Federal Reserve Will Continue Supporting The Economy Despite Surging Prices
BY SCOTT HORSLEY
The Federal Reserve will continue pumping money into the economy despite a sharp jump in consumer prices.
The central bank said Wednesday it would leave interest rates near zero and maintain its aggressive program of bond purchases in hopes of encouraging a faster rebound from the pandemic recession.
“We at the Fed will do everything we can to support the economy for as long as it takes to complete the recovery,” Fed chairman Jerome Powell told reporters Wednesday.
Fed officials raised their forecast for inflation this year, but continued to predict a return to more stable prices next year.
“We are also seeing upward pressure on prices from the rebound in spending as the economy continues to reopen,” Powell said, adding that “bottleneck effects” from tangled supply chains have been “larger than anticipated.”
The Fed believes the spike in prices is likely to be temporary, though, as businesses race to catch up with surging demand from newly vaccinated consumers.
Participants in the Fed’s policy meeting predicted prices would be 3.4% higher at the end of this year than in 2020 — up from the 2.4% inflation rate they were forecasting three months ago. In 2022, however, inflation is projected to be just 2.1%, barely above the March forecast.
The Labor Department, which uses a different measure of consumer prices, said last week inflation reached 5% for the 12-month period ending in May — the sharpest jump in nearly 13 years.
The Fed is willing to tolerate higher inflation for a period of time in hopes of putting more people back to work. There are still 7.6 million fewer jobs in the U.S. than there were before the pandemic.
Although the Fed is leaving interest rates near zero for now, policy makers anticipate raising rates earlier than they did three months ago.
Seven members of the rate-setting committee now expect a rate hike next year — up from four who anticipated that in March. Thirteen of the 18 committee members expect a rate hike in 2023 — up from seven who thought so three months ago.
The expectation of an earlier rate hike is a sign of growing confidence in the economic rebound. Policy makers now think the economy will grow by 7% this year — an improvement from the March forecast of 6.5%.
“I would not declare victory yet,” Powell said. “It’s so great to see the reopening of the economy, though, and to see people out living their lives again. Who doesn’t want to see that?”