BUSINESS Fed faces 'balancing act' between inflation, faster growth

BUSINESS

Fed faces 'balancing act' between inflation, faster growth

AFP

14:44, March 17, 2021

Fed Chair Jerome Powell. File photo: Agencies

The Federal Reserve has made it clear it is too soon to think about pulling back on stimulus for the pandemic-battered economy, but finds itself stuck between an improving outlook and inflation fears.

The US central bank will wrap up its two-day policy meeting on Wednesday, where it will likely comment on the accelerations in Covid-19 vaccine campaigns and reopening of businesses, which are fueling optimism that life in the United States can return to normal.

And into that improving economy comes a flood of government funds: a $1.9 trillion relief package President Joe Biden signed last week, and the remainder of the $900 billion measure approved in December.

Economists expect that influx of cash to shore up businesses and boost spending, but markets worry it will bring with it an upward spiral of prices.

Fed Chair Jerome Powell will have a chance at his post-meeting news conference to allay those concerns and repeat his assertion that while prices will rise this year, any spikes from the depressed levels of 2020 will be transitory and no reason for the bank to take action.

In fact, the Fed wants prices to rise to some extent, since they have lagged below its two percent target for years.

The Fed faces "a delicate balancing act," BNP Paribas chief economist William De Vijlder said.

Members of the policy-setting Federal Open Market Committee (FOMC) are expected to raise their economic projections from December to take into account the stimulus and improving outlook.

But De Vijlder said that will just "add fuel to the fire" of potential price increases and cause yields on US Treasury debt to rise again -- the inflationary red flag that has sent stock markets on a roller-coaster ride in recent weeks.

Powell has made it clear the Fed will wait until employment has recovered and inflation is securely above two percent before it will roll back its easy money policy.

And he notes it has the tools to ward off any uncontrolled price spike.

"Fed officials would happily raise rates to cool what would be an overheating economy for the first time in, well, decades," Grant Thornton economist Diane Swonk said.

"That would mark a policy achievement for the Fed, rather than the failure the bond market is anticipating."

But she noted that this crisis is unique so "we can't completely rule out a more vicious inflation cycle."

Powell's "hardest job" will be to clarify the central bank's plans when faced with "a temporary flare in inflation this spring and summer."

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