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Fed set to reaffirm recovery mission, face down inflation fears

Heather SCOTT
·3-min read
Federal Reserve Chair Jerome Powell has pledged not to raise interest rates until inflation holds above 2% for some time

The Federal Reserve opened its final day of policy deliberations on Wednesday and is expected to reaffirm its commitment to sustaining stimulus to the US economy until it has recovered from the Covid-19 damage.

But as the accelerating vaccination campaign offers hope life can return to normal following the disruptions caused by the pandemic, the Fed has to face down growing concerns that surging economic activity will ignite uncontrolled inflation.

The central bank slashed the benchmark lending rate to zero in the early days of the crisis in March 2020 and then started pumping cash into the economy, moves that together with massive federal rescue spending were credited with preventing a worse downturn.

The Fed's policy-setting Federal Open Market Committee (FOMC) is expected to confirm that it will not raise rates or pull back from its aggressive bond buying program for some time when it announces its decision at 1800 GMT at the end of the two-day meeting.

It will be up to Fed Chair Jerome Powell in his post-meeting press conference to once again try to beat back fears the central bank will lose control of prices.

After sharp declines in the early months of the pandemic as demand tanked when the economy shut down, prices of many goods and services have spiked, exacerbated in some cases by supply issues.

Gasoline prices jumped in March as more commuters and travelers returned to the roads and air, and copper prices have surged and are close to surpassing the record of $10,190 a tonne set just over a decade ago.

"It's a trend for the broader commodities. Lumber prices are up as well, tin prices are going crazy," ClipperData analyst Matt Smith told AFP.

Stocks opened mixed, with the benchmark Dow Jones Industrial Average losing ground ahead of the Fed announcement.

- Ending the party -

"The intrigue -- or hesitancy -- is wrapped up in what Mr. Powell will say and whether he makes any inkling of a reference to the Fed starting to discuss when it might consider tapering its asset purchases," analyst Patrick J O'Hare said.

Powell said any price spikes in the near term are likely to be transitory and policymakers will hold off on reacting until inflation has remained above the 2.0 percent target for an unspecified period of time.

Noted Harvard economist and former Treasury secretary Lawrence Summers has been the leading voice flagging concerns about the Fed's complacent attitude towards price increases.

In a seminar last week, Summers cited the old Fed maxim that its goal is to "take away the punch bowl before the party gets out of hand," and lamented that "what we are now saying is we are not going to do anything until we see a bunch of drunk people staggering around."

But Powell has frequently noted that it took a decade after the 2008 global financial crisis for the US economy to return to full employment, while inflation consistently fell short of its target.

Responding to Summers' concerns, Diane Swonk of Grant Thornton said "the Fed is more focused on getting people off the sidelines and dancing than throwing a frat party.

"They have looked in the mirror and realized their past mistakes; preemptive rate hikes left the economy with a residual chill. The inflation they anticipated never materialized," she said in an analysis.