Federal Reserve says interest rates will have to rise SOON because inflation is at its highest since 1982: Central Bank suggested in January there will be aggressive tightening with prices soaring
- In January, the consumer price index jumped 7.5% from a year ago, reaching a record rise for the fourth consecutive month
- At a policy meeting on January 25-26, even before the most recent figures were released, officials agreed that interest rates would be raised at a “faster pace.”
- The document revealed that meeting participants agreed that the rate hike would be “appropriate soon,” as would the reduction in Fed holdings.
- The central bank currently holds a $9 trillion securities portfolio
Federal Reserve officials agreed they would need to raise interest rates ‘soon’ and at a ‘faster pace’ than before to rein in inflation which has now hit a 40-year high in the states. -United.
In January, the consumer price index jumped 7.5% from a year ago, reaching a record high for the fourth consecutive month. At a policy meeting on January 25-26, even before the most recent figures were released, officials agreed that the central bank’s target interest rate would be raised at a “faster pace” than during the the Fed’s last rate hike in 2015, according to the released minutes. Wednesday.
The document revealed that meeting participants agreed that the rate hike would be “appropriate soon,” as would the reduction in Fed holdings. The central bank currently holds a securities portfolio of $9 trillion.
“Participants observed that, given the current high level of holdings of Federal Reserve securities, a significant reduction in the size of the balance sheet would likely be appropriate,” a summary of the meeting said.
Investors expect the Fed to start raising rates in March by half a percent. Goldman Sachs predicts the Fed will hike rates four times this year, once more than expected.
The current rate is between 0 and 0.25%. Experts estimate that there is now a 50% chance that the Fed will raise its benchmark rate by 1.75%.
The Federal Reserve insisted for months that inflation would be “transitional” and in December 2020 predicted that for 2021 inflation would total 1.8%, below its annual target of 2%.
But the Fed, for the first time in decades, pursued policies favoring maximum employment rather than controlling inflation. In recent months, it has changed course dramatically, announcing last month that it would begin a series of interest rate hikes in March.
Prices have risen for a sixth straight month, meaning Americans have consistently had to shell out more for daily living since August 2021
Inflation hit a 40-year high of 7.5%, the Labor Department said Thursday, a number not seen since the Carter administration.
The last time inflation was at 7.5%, Reagan had just taken office and the “Great Inflation” was ending
The period of “great inflation” from 1965 to 1982 was marked by a spike in inflation that exceeded 14% in 1980.
Thursday’s January inflation reading put annual inflation at 7.5%, the highest level since February 1982, as the period known as the “Great Inflation” drew to a close.
Stimulated by the failure of monetary policy and two oil crises in 1973 and 1979, the period from 1965 to 1982 was marked by runaway inflation which exceeded 14% in 1980.
Consumers suffered greatly from rising prices, and outrage over the inflation crisis contributed to Ronald Reagan’s defeat of incumbent President Jimmy Carter in 1980.
“Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hitman,” Reagan said, and he devoted the early years of his presidency to tackling to the problem.
Reagan’s controversial economic policy was based on four key pillars: cutting government spending, cutting taxes, reducing regulations, and tightening the money supply through higher interest rates.
Opponents claimed at the time that Reagan’s policies would push prices even higher, but history proved them wrong and inflation soon returned to sustainable levels.
A woman shopping in the Pioneer grocery store, New York, USA, March 1983
Powell said in December the country was making “rapid progress” towards its maximum employment target, but inflation posed a “real risk”.
In January, US employers added 467,000 jobs that month, far more than expected. The unemployment rate rose slightly from 3.9% in December to 4% in January.
The Federal Reserve is also expected to start scaling back its pandemic-era bond purchases next month. Over the past two years, the Fed has purchased at least $120 billion a month in Treasuries and mortgage-backed securities to stimulate the economy.
Policymakers have yet to determine how much to cut Fed assets each month and when to start.
Officials expect inflation to hit 2.6% next year, after a projection of 2.2% in September, while predicting the unemployment rate will fall to 3.5%.
The Fed’s main tool to fight inflation is to set the short-term borrowing rate for commercial banks, which then pass that rate on to consumers and businesses.
Mortgage rates also continue to climb. The average interest rate for a standard 30-year mortgage is 4.20%, up 0.27% from a week ago.
Meanwhile, Larry Summers, who served as Treasury Secretary under President Clinton and also served in the Obama administration, said Wednesday that the Fed was “well behind the curve” and predicted inflation problems. would get even worse.
“I suspect next month it will get worse rather than better,” Summers said at a virtual event, hosted by No Labels, a bipartisan problem-solving group.
He said the Fed must immediately end its bond-buying stimulus program, known as quantitative easing (QE).
“I think the Fed should immediately, like tomorrow, end QE,” Summers said. “I think ending it immediately would have a useful symbolic meaning to demonstrate that they understand that they have worked their way behind the curve.”