A slight increase in the rate? Fed’s cautious stance could hurt jobs

Bohr Howard Schneider

WASHINGTON, Nov. 18 (Reuters) – Over the past 20 months, the U.S. Federal Reserve has targeted its monetary policy arsenal with one goal: to restore jobs, especially to low-income people whose conditions have suffered the greatest impact during the pandemic.

Interest rates remain steady near zero and central bank debt purchases continue, although inflation is accelerating and unemployment is rapidly declining, a combination that is beginning to resonate with those who believe, as it does, that the central bank can do more harm than good in its objective. of reviving the labor market.

In a call for the Federal Reserve to take a quick turn toward tougher policy, prominent Democratic economist and former Chairman of the Council of Economic Advisers Jason Furman said on Wednesday that the central bank is out of step with the economic situation.

Also, if you have to catch a drastic change in policy and accelerated cycles of interest rate increases in the future, you will apparently hurt those you intend to help.

“An overheated economy helps vulnerable workers the most,” Forman, now a Harvard University professor, wrote in a presentation prepared for the Peterson Institute for International Economics.

“But the recession hurts these vulnerable workers the most… Lowering inflation a little bit now could help avoid the need for more severe and painful steps in the future and reduce the likelihood of a recession with millions of jobs lost.” , handle.

His call for the Federal Reserve to quickly end bond purchases and lay out a plan to raise “virtual” interest rates in the first half of 2022 is the latest in the current debate from economists, investors, elected officials and lawmakers about the risks posed by inflation. At its highest levels in 30 years, how should the central bank respond?

Investors are now expecting the Fed to raise interest rates perhaps three times next year. The Fed is divided over whether it will need to implement cost-credit increases in 2022, a situation that Foreman says stems from “wishful thinking” about inflation by at least two agency officials.

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The rapid pace of price increases was initially seen as a passing effect of reopening after the pandemic, but it has persisted and is larger than expected.

The issue is also beginning to weigh on the popularity of President Joe Biden, who is considering whether to reappoint incumbent Federal Reserve Chairman Jerome Powell for a second four-year term or replace him with Governor Lyle Brainard.

A decision is expected before the Thanksgiving holiday, the White House said on Wednesday, and Biden’s stance on the announcement — his “focus” on the appointment as Foreman said — could indicate whether the government sees inflation. for their plans for major new infrastructure and social spending.

Some economists, such as Nella Richardson of ADP Payroll Wizard, support arguments similar to Furman’s, noting that inflation itself is undermining lower-income families less able to wait until mid-2022 for peak price increases to dissipate.

Other experts note that the dynamics that have kept prices reliably low in recent years, such as the huge discounts available online, have been reversed.

Software maker Adobe Inc’s monthly online price index hit its 17th consecutive rise in October, reversing years of steady decline, and is already up 1.9% year over year.

“For consumers, the place where they expected better and better value for a product is disappearing,” said Taylor Schreiner, director of Adobe Digital Insights, who has noted fewer discounts and offers, even this holiday season.

(Additional reporting by Howard Schneider; additional reporting by Ann Sapphire. Editing in Spanish by Marion Giraldo)