Fed Alters Projection on Inflation, Says It Could Stick Around Longer Than Expected

The Federal Reserve altered its standing language on inflation Wednesday, suggesting that sector-wide cost markups could remain in place as the economy extracts itself from the pandemic.

Previously, the Fed stated inflation was based on "transitory factors," which were often byproducts of supply chain disruption. The economy lurched out of a valley to its current and ongoing rapid recovery, jolting the supply of and demand for goods.

However, a shift came Wednesday when the central bank took a more leveled tone that echoed recent comments from Federal Reserve Chair Jerome Powell. The Fed said in a statement "risks to the economic outlook remain" and noted the economy's ongoing dependence on the course of COVID-19.

Prices received a jolt from a 4.4 percent year-over-year rise in September. The jump represented the fastest 12-month increase since 1991, the Associated Press reported. This means inflation is in a head-to-head battle with recent wage increases that many Americans—particularly in the restaurant industry—have received. The Fed is now tasked with balancing economic measures that not only encourage hiring but also combat growing inflation.

"Inflation has come in higher than expected," Powell said at a press conference Wednesday.

As for the impact of "bottlenecks" on the economy and, in turn, inflation, the Fed chair said: "They are now on track to persist well into next year."

For more reporting from the Associated Press, see below.

Powell Re-Nomination
Federal Reserve Chair Jerome Powell said Wednesday he expects inflation to linger into next year. Above, Powell testifies during a House Financial Services Committee hearing on Capitol Hill in Washington on Sept. 30, 2021. Sarah Silbiger/Pool Photo via AP

In response, the Federal Reserve will begin dialing back the extraordinary economic aid it's provided since the pandemic erupted last year.

In a statement Wednesday after its latest policy meeting, the Fed said it will start reducing its $120 billion in monthly bond purchases in the coming weeks, by $15 billion a month, though it reserved the right to change that pace. Those purchases have been intended to hold down long-term interest rates to encourage borrowing and spending. With the economy recovering, that's no longer needed.

The Fed will slow its $80 billion in Treasury purchases by $10 billion a month and its $40 billion in mortgage-backed securities by $5 billion in November and December and said similar reductions "will likely be appropriate" in the following months. That suggests that the central bank might decide to accelerate its pullback in bond buying if inflation worsens.

If the pace is maintained, the bond purchases would end altogether in June. At that point, the Fed could decide to raise its benchmark short-term interest rate, which affects many consumer and business loans. That would be much earlier than Fed officials had envisioned last summer, when they collectively forecast that the first rate hike wouldn't happen until late 2023.

According to the Chicago Mercantile Exchange's FedWatch tool, market traders now expect at least two rate hikes during 2022.

The changing expectations reflect a central bank that is rapidly shifting from an effort to boost the economy and encourage more hiring to one that is increasingly focused on rising inflation.

The Fed's latest statement also suggested that the officials still think shortages of materials and labor are major factors in the rise in inflation — factors that would presumably ease over time.

"Supply and demand imbalances related to the pandemic and the reopening of the economy," the statement said, "have contributed to sizable price increases in some sectors."

The economy has steadily recovered from the pandemic recession, although growth and hiring stumbled in the July-September quarter, partly because a surge in delta cases discouraged many people from traveling, shopping and eating out.

Many economists say they're hopeful that with vaccinations increasing and the delta wave fading, job growth will pick up in October from September's weak pace. The October jobs report will be released Friday.

While inflation is running hot, the job market isn't back to full strength. The unemployment rate was 4.8 percent in September, above its pre-pandemic level of 3.5 percent. And roughly 5 million fewer people have jobs now than did before the pandemic.

The Fed's meeting occurred as Powell's future as Fed chair remains uncertain. President Joe Biden has yet to announce whether he will re-nominate Powell for another four-year term. Powell's current term expires in early February, but previous presidents have usually announced such decisions in the late summer or early fall.