What You Need to Know
- Investors increasingly expect Fed officials to begin raising the benchmark interest rate as soon as the middle of next year.
- “It is time the Fed acknowledge the surge in inflation has been larger and lasted longer than they hoped,” said Diane Swonk, chief economist at Grant Thornton
- Currently, the Fed is acquiring $120 billion of Treasuries and mortgage-backed securities each month.
Federal Reserve Chair Jerome Powell sounded a note of heightened concern over persistently high inflation as he made clear that the central bank will begin tapering its bond purchases shortly but remain patient on raising interest rates.
“The risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation,” Powell said Friday during a virtual panel discussion hosted by the South African Reserve Bank and moderated by Bloomberg’s Francine Lacqua.
“I would say our policy is well-positioned to manage a range of plausible outcomes,” he said. “I do think it’s time to taper and I don’t think it’s time to raise rates.”
Powell and his colleagues on the policy-setting Federal Open Market Committee are expected to announce at their Nov. 2-3 policy meeting that they will begin winding down the bond-buying program put in place last year in the early days of the pandemic.
Currently, the Fed is acquiring $120 billion of Treasuries and mortgage-backed securities each month, and the coming reduction in the pace of purchases will mark the central bank’s first step toward the exit from the monetary support measures rolled out in 2020 to shield the economy from the effects of the coronavirus.
The Fed chair was speaking on the final day before monetary policy makers enter a media blackout period ahead of the FOMC’s upcoming meeting. Fed-watchers homed in on his characterization of growing inflation risks at the end of a week when measures of inflation compensation in financial markets rose to multi-decade highs.
“Powell sounded less anxious about employment and more anxious about inflation,” said Neil Dutta, head of economics at Renaissance Macro Research in New York. “He is not really leaning against the market pricing, which is revealing in and of itself.”
Investors increasingly expect Fed officials to begin raising their benchmark interest rate, which is currently just above zero, as soon as the middle of next year.