Cars, homes, fuel, clothes, and other goods are costing Americans the most. However, it is expected that the President of the US Federal Reserve, Jerome Powell, will abide by the measures previously approved by his institution, and at the same time he is keen that the price hike is temporary.
For months, the official has been downplaying fears of a repeat of the hyperinflation that the country witnessed in the seventies.
And Cathy Bostancik, an expert at Oxford Economics, expects that “(Federal Reserve) officials will continue to predict that the current imbalance between supply and demand will resolve in the coming months.”
The increase in prices reached 5 percent during last May, compared to last year, according to the Consumer Price Index (CPI). It is certainly a big jump, but it is largely due to the impact of the comparison with prices that fell in the spring of 2020.
The Federal Reserve uses another measure of inflation, the Personal Consumption Expenditure Index (PCE), which in April saw its strongest acceleration since 2007, rising 3.6 percent in one year.
The Federal Reserve is watching inflation closely, but it is unlikely that it will decide this week to reduce its support for the US economy.
The country is still far from fully recovering from the crisis caused by the Corona virus, and from achieving the level of full employment that the Central Bank is aiming for. A rapid abandonment of extraordinary measures could threaten prospects for a sustainable recovery, particularly in the labor market.
The unemployment rate fell to 5.8 percent, but it remains far from the previous rate of the crisis, which reached 3.5 percent, and there is still a difference of 7.6 million jobs compared to the same period.
“No one knows whether people will return to work or not,” says Omari Swinton, a professor of economics at Howard University, stressing that “the goal of ensuring the resumption of employment with strength is more important than inflation.”
Paradoxically, however, American companies are having difficulties finding employees, especially in low-wage jobs, prompting them to raise salaries to attract workers, causing inflation.
The economist adds regarding the “Federal Reserve”: “Maybe they will not raise rates (interest). But I think they will have to start thinking of other ways to solve the problem.”
Interest rates are expected to remain at their current level for some time, after they were lowered to a range between zero and 0.25 percent in March 2020.
Each member of the institution’s monetary policy committee will have their say on when to increase it: in March, 4 of them proposed increasing it, starting in 2022 instead of 2023. This proposal received support from only one member in December.
With that, the 11 members of the committee can start thinking about the next step. At their last meeting at the end of April, some of them proposed for the first time to start discussing limiting asset buybacks.
The Federal Reserve buys $120 billion in assets each month, including Treasury bonds, with the aim of facilitating borrowing, supporting the recovery and lowering interest rates.
Kathy Bostancik expects “a gradual reduction (…) starting in early 2022”, before starting to raise rates in 2023.
On the other hand, the financial institution will update its economic forecast. In March, it had forecast GDP growth of 6.5 percent in 2021 and 3.3 percent in 2022.
The Federal Reserve was also optimistic about the unemployment rate; It expected it to drop to 4.5 percent this year, 3.9 percent in 2022 and 3.5 percent in 2023, which is the pre-crisis rate and the lowest in 50 years.
As for inflation, it was expected that it would be at the level of 2.4 percent in 2021, before stabilizing in the range of two percent in line with its long-term goal.