Fed announces plan to fight rising inflation | Hartsville

The Federal Reserve signaled last week that it plans to start raising its benchmark interest rate as early as March, a key step to reversing its pandemic-era low rate policies that have fueled hiring and growth. , but also pushes up inflation.

With high inflation weighing on consumers and businesses and unemployment steadily falling, the Fed also said on January 26 that it would phase out its monthly bond purchases, which were aimed at driving down long-term rates. , in March.

Fed actions are sure to make a wide range of borrowing — from mortgages and credit cards to auto loans and business credit — more expensive over time. These higher borrowing costs, in turn, could slow consumer spending and hiring. The most serious risk is that the Fed’s abandonment of low rates could trigger a new recession.

The central bank’s latest policy statement follows wild swings in the stock market as investors are gripped by fear and uncertainty about how quickly and how far the Fed will go to reverse its rate policies lows, which have fueled the economy and the markets for years. .

High inflation has also emerged as a serious political threat to President Joe Biden and congressional Democrats, with Republicans pointing to rising prices as one of their main lines of attack as they eye the November election.

Still, Biden said last week that it was “appropriate” for Chairman Jerome Powell to adjust Fed policies. And congressional Republicans endorsed Powell’s plans to raise rates, providing the Fed with rare bipartisan support to tighten credit.

A separate potential source of higher rates is the Fed’s plans for its bond holdings, which are at an all-time high of nearly $9 trillion. The bond purchases, which the Fed financed by creating money, were aimed at reducing long-term interest rates to stimulate borrowing and spending. Many investors also viewed bond buying as helping to fuel stock market gains by injecting liquidity into the financial system.

Some economists have expressed concern that the Fed is already acting too late to tackle high inflation. Others say they fear the Fed is acting too aggressively. They argue that many rate hikes could unnecessarily slow down hiring. From this perspective, high prices primarily reflect tangled supply chains that Fed rate hikes are powerless to remedy.

Last week’s Fed meeting is taking place against the backdrop of not just high inflation – consumer prices have jumped 7% over the past year, the fastest pace in nearly four decades — but also of an economy plagued by a new wave of COVID-19 infections.

Fed Chairman Jerome Powell admitted that he did not foresee the persistence of high inflation, having long expressed the belief that it would be temporary. The spike in inflation has spread to areas beyond those hit by supply shortages – to apartment rents, for example – suggesting it could linger even after the goods and coins move more freely.

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