Fed hopes economy poised to ease inflation as rate hikes loom

WASHINGTON, Feb 9 (Reuters) – New data released on Thursday is expected to show U.S. inflation is still at a multi-decade high, but Federal Reserve officials are hopeful the peak could be near.

“There is evidence that we are on the verge” of inflation possibly starting to subside by the middle of the year, Atlanta Fed President Raphael Bostic said Wednesday. in an interview with CNBC.

In separate comments, Cleveland Fed Chair Loretta Mester said she also expects inflation to decline this year as the Fed steadily tightens credit.

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The headline consumer price index is expected to have risen more than 7% in January on an annualized basis, a level reminiscent of the inflationary shocks of the 1970s and 1980s that prompted the Fed to accelerate its plans to raise costs. borrowing and reducing its holdings of government bonds and mortgage-backed securities

But the pace of month-to-month changes has slowed, a sign that the economy may be going through supply chain and other difficulties created by the pandemic.

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“What we have seen is that inflation is not getting worse month on month, and hopefully that will translate into a slow decline over the spring and summer” , Bostic said. This will “reassure me that we are headed in the right direction” and perhaps allow the Fed to raise rates at a slower pace as the economy continues to recover, he said.

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There is broad agreement within the Fed to begin raising interest rates at the March 15-16 policy meeting. But there’s no clarity on what the Fed will need to do to counter inflation, or on the likelihood that goods supply chains and the US labor market will return to something like the pre-pandemic normal of low inflation alongside low unemployment.

Some analysts say the Fed is already out of step with the direction the economy is taking. The unemployment rate is currently 4%, low by historical standards, and could be much lower due to record job openings, rising wages and a potentially weak economy. jump over the year as the current pandemic wave recedes.

Some see the unemployment rate falling to or below 3% this year, the likes of which have not been seen since the 1950s read more .

“The economy is blowing through the stop signs,” Ethan Harris, head of global economics at Bank of America, said this week. Harris has been among the more aggressive forecasters in expecting the Fed to raise interest rates seven times this year, which would mean hikes at each of its remaining policy meetings in 2022.

“They’re really not ready to capitulate and say we’re behind” in the fight against inflation, he said. “I think they should.”

There hasn’t been a cycle of tightening as it goes, meeting by meeting, since the early 2000s when former Fed chief Alan Greenspan ended his term.

But the pandemic-era economy has surprised more than once, and there are big competing forces at work — a drop in federal government spending, for example, that could slow consumption, and healthy household balance sheets that could sustain it.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said he expects a combination of rising inventories, easing global shipping conditions and initial Fed rate hikes to do rapidly lower inflation – back to the Fed’s 2% target next year, with prices for key goods like autos falling even later in 2022.

Rates will have to rise further, he said, but because the economy is improving, not because of a Fed “sprint” to fight inflation.

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“This Fed will move cautiously once it feels like it has the core inflation chart in its hands. That should happen by the middle of the year,” Shepherdson said, as he forecasts car prices will be “in free fall”, the appreciation of real estate prices will slow down. , and year-over-year price comparisons will work in favor of lower inflation.

FINANCIAL MARKETS, SUPPLY CHAINS

In financial markets, household and corporate interest rates have already risen since the Fed began easing its bond purchases late last year and announced upcoming rate hikes. A “shadow” federal funds rate maintained by the Atlanta Fed shows that bond markets have since produced the equivalent of an increase of almost 2 percentage points. The cost of financing a house is increasing.

There is also evidence of supply chain improvements. Inventories in many goods sectors have been replenished, a buffer against the kind of shortages that drove up goods prices at the start of the pandemic.

Following the release of its latest results on Wednesday, executives at shipping giant AP Moller-Maersk said they expect global shipping conditions to “normalise” in the second half of 2022. Port backlogs and shortages of containers have plagued businesses throughout the pandemic as global manufacturers have found it harder to reopen the global economy than to shut it down in response to the pandemic.

“Inflation has peaked,” Moody’s Analytics chief economist Mark Zandi said on Twitter. “As the pandemic continues to wane…so does inflation. Global supply chains are smoothing things out…And wage growth will moderate as workers regain their health.”

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Reporting by Howard Schneider; Additional reporting by Jonnelle Marte; Editing by Paul Simao and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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