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The U.S. Federal Reserve is prepared to end its monthly bond-buying program of economic support sooner than the mid-2022 date it had earlier set, Fed chair Jerome Powell said in 30 November testimony before Congress.
The Fed voted to taper its $120-billion monthly bond purchases by $15 billion in each of November and December; continuing that pace into 2022 would close out the purchases by mid-year, clearing the way for higher interest rates.
The Fed has said it will not raise rates while continuing to stimulate the economy by purchasing bonds. The two actions would work at cross purposes.
“The economy is very strong and inflationary pressures are high,” Powell said. “Therefore, it is appropriate to consider wrapping up the taper…of our asset purchases…a few months sooner.”
A quicker end to the support program would enable the Fed to raise interest rates during the first half of next year if inflation continues unabated.
“The risk of inflation has increased,” Powell acknowledged. Prices increased at 5 percent in October, year over year.
Powell also backed still further from the Fed’s previous statements that inflation was “temporary” or “transitory.”
“We didn’t predict the supply-side problems” in the global supply chain “and those are highly unusual and very difficult, very nonlinear,” he told Congress.
However, he once again predicted that supply-line clogs would clear next year, slowing inflation.
Rising inflation dictates higher interest rates, while the new Omicron COVID variant, if it proves to be both powerful and virulent, would call on the Fed to keep rates low to keep a weakened economy from imploding into recession.
Also, serial virus outbreaks could keep workers from returning to the labor market, a development that could drive both wages and prices higher.
“To get back to the great labor market we had before [COVID], we need price stability,” Powell said.
“The risk of persistent high inflation is also a major risk to getting back to such a labor market,” he added.
Powell’s comments drove the Dow down more than 650 points on November’s last day.
Stocks most affected by interest rates, such as banks, and by supply-chain issues, including manufacturers, sank after Powell spoke.
TREND FORECAST: Jerome Powell is either a dumb economist or a liar. We had long forecast rising inflation. But at his December 2020 press conference, the Fed-Head Powell pointed to “disinflationary pressures around the globe” and said “it’s not going to be easy to have inflation move up.”
A month later, with inflation on the move well above the Fed’s 2-percent target rate, Powell said it was only “temporary.”
In July, with inflation running at 5 percent, Powell told a Congressional committee that “we really do believe that these things will come down of their own accord as the economy reopens,” he noted.
Wrong, wrong, and wrong.
As we noted in “Fed: Stronger Economy, Steady Rates” (23 Mar 2021), Fed officials predicted overall U.S. inflation this year would be 2.4 percent.
Instead, it topped 6 percent in October and has averaged 4.1 percent from January through October.
Until November, Powell and the Fed’s Open Market Committee were referring to inflation as “temporary,” which became “transitory,” a more useful weasel word as what Powell had called “temporary” stretched into its 10th month.
In his testimony last week, Powell admitted it is “probably a good time to retire” the Fed’s characterization of inflation as transitory.
In fact, considering his inaccuracy, it is “probably a time to retire” Powell, but staying on his losing streak, two weeks ago President Biden reappointed Powell for another term as Fed-Head of the Bankster Bandits.
Indeed, The Fed’s credibility has become another casualty of the COVID War.