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US Fed expected to hold on despite rising inflation

Even in the face of rising inflation, poor progress in restoring jobs lost during the pandemic means the US Federal Reserve is unlikely to change monetary policy at its meeting next week.

Central Bank Chief Jerome Powell has made it clear that the Fed will keep its massive bond buying program and lending rates low until data reflects lasting improvement in employment in all economic strata.

But the recent spike in inflation in the world’s largest economy is stepping up pressure on policymakers to start withdrawing stimulus packages.

Clues as to whether central bankers will fold can be seen next week when the Federal Open Markets Committee (FOMC) that sets the Fed’s policy holds its two-day policy meeting.

“No good deed goes unpunished and it does with the rapid reopening of the economy,” economist Joel Naroff said in an analysis.

“The upside is that growth is soaring. The downside is that consumer inflation is rising and labor issues are putting pressure on businesses.”

– Focus on trades –

With widespread vaccinations in recent months and massive government aid, the US economy has come back in force from the Covid-19 crisis as businesses rushed to reopen.

But the process has been bumpy and other countries have not kept pace, creating a shortage of supplies and workers.

This in turn sent prices soaring, with the Consumer Price Index hitting a 13-year high of 5% in May compared to the same month in 2020.

While Fed officials have repeatedly assured that the increase was mainly due to temporary problems – used car prices alone are the bulk of the rise – some financial market participants have started to rise. sound the alarm, just like Republicans opposed to President Joe Biden. spending plans.

“We should all be very worried,” Republican Senator Pat Toomey tweeted last week.

“It is high time the Fed started the process of normalizing its monetary policy.”

Omari Swinton, chairman of Howard University’s economics department, said companies struggling to fill vacancies when they reopen or compete with the $ 1,000 signing bonus offered by the major employer American Amazon, wage and price inflation are legitimate concerns.

But the “systemic” problem of the labor shortage is the most important target of the Fed’s policy deliberations, he said, especially if the labor pool permanently shrinks to. the aftermath of the pandemic.

“Nobody knows whether people will go back to work or not,” Swinton told AFP. “So their goal of making sure the job recovery is strong is more important than inflation.”

This has been Powell’s position: to minimize inflationary fears while emphasizing the importance of allowing the economy to grow fast enough that even low-wage workers can find jobs.

– New forecasts –

While the official unemployment rate fell to 5.8% in May, unemployment among black Americans remains much higher at 9.1%, and more than seven million jobs lost during the pandemic have yet to be restored.

“The labor market recovery since the end of last year has been strong, but it remains far from widespread and inclusive,” said Kathy Bostjancic of Oxford Economics.

Even if Fed policy remains unchanged, Powell could reassure the world that the central bank will be vigilant in the face of inflation, and he could signal that they are “talking about talking” about the right time to start slowing down purchases of assets, which pumped out cash. in the economy throughout the crisis.

Many economists expect Powell to give clearer guidance on cutback plans in August at an annual central bank conference in Jackson Hole, Wyoming.

At that meeting, the FOMC will also release the latest quarterly forecasts from the 17 committee members, which are expected to reflect the improving economic outlook and show a median projection of an interest rate hike in 2023.

In the latest Summary of Economic Projections (SEP) for March, no increase in the benchmark borrowing rate was expected until 2023.

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