Pressure is mounting for the Federal Reserve to rein in inflation more aggressively after consumer prices rose once again, bringing inflation to levels not seen since the Great Inflation of the 1960s and 1970s.
Consumer prices rose 7.5% in the 12 months ending in January, the fastest pace of inflation in four decades and a sizable half percentage point increase from December’s number. Prices rose for a wide range of items, including housing, cars, and groceries.
Now investors and politicians are eager to see how aggressively the Fed and its chairman, Jerome Powell, will respond to the soaring prices. The central bank enacted unprecedented measures to ease monetary policy after the start of the pandemic, including by lowering its interest rate target to zero and buying government bonds in huge quantities. It has been tapering its massive monthly asset purchasing program for weeks now and is expected to raise short-term interest rates — the biggest question is how quickly it will do so.
Greg McBride, Bankrate’s chief financial analyst, told the Washington Examiner on Thursday that he thinks the odds of the Fed acting more aggressively to stave off inflation has increased because of the hotter-than-expected report.
WHITE HOUSE: ‘INFLATION CHALLENGE IS REAL,’ SO PASS BIDEN’S SPENDING PROPOSALS
McBride said that he thinks that the Fed should be more aggressive right out of the gate and do a half-percentage-point interest rate hike in March, as opposed to two successive quarter-point increases. He said doing so would “send a message” that the central bank is serious about tamping down the higher costs.
Traders also responded to Thursday’s report by betting that the Fed, under pressure from the high numbers, will move more forcefully. Futures are pricing in a greater than 50% chance that the Fed will do a half-point hike in March, something that has not been done in more than two decades.
“Judging by the public comments of various Fed committee members, a half-point hike isn’t something that has been ruled out,” McBride said. “But they’re not guiding expectations in a way that would make you think that this is a high probability, maybe that changes over the next few weeks.”
James Bullard, the president of the Federal Reserve Bank of St. Louis, endorsed the more hawkish tack after Thursday morning’s report. Bullard, an influential economist who is one of those who votes on Fed monetary policy, indicated that he is supportive of a half-point hike.
“I’d like to see 100 basis points in the bag by July 1,” Bullard told Bloomberg. “I was already more hawkish, but I have pulled up dramatically what I think the committee should do.”
Powell and the Fed are facing political pressure to act more assertively. Several Republican lawmakers have been pushing the central bank to tighten its monetary policy and ratchet up rates for months now. Thursday’s news of 7.5% inflation has only bolstered those arguments. The Fed’s target is for inflation to run at 2%, although it uses the personal consumption expenditure price index as its gauge. While it remains high, PCE inflation is running a bit lower than CPI inflation, at 5.8%.
Sen. Joe Manchin, a centrist Democrat and key Senate swing vote, said in a statement after the new report that took a subtle jab at the Fed for dragging its feet on raising interest rates. He has consistently raised concerns about inflation and cited the higher prices in his apprehension about passing some of President Joe Biden’s spending agenda.
“Once again, we are witnessing that the threat of inflation is real,” the West Virginia lawmaker said Thursday. “We must get serious about the finances of our country. It’s time we start acting like stewards of our economy and the money the American people entrust their government with. … We all have a responsibility to do all that is possible to roll back inflation and manage our debts because the longer we or the Federal Reserve waits to act, the more economic pain will be caused.”
Powell, a Republican who was first nominated to lead the Fed by former President Donald Trump, was renominated by Biden last year, something that did not come as much of a surprise. Democrats have cheered him for making full employment a priority and for keeping the central bank independent.
While Powell enjoys bipartisan support and will almost undoubtedly be reconfirmed for another term at the helm of the central bank, Thursday’s inflation numbers will cause some discussion of Powell’s leadership and tenure among monetary hawks.
WHAT TO EXPECT WHEN THE FEDERAL RESERVE HIKES INTEREST RATES
Even before inflation was clocking in above 7%, Sen. Pat Toomey, who is the Senate Banking Committee’s ranking member, told Powell that he is concerned about the path that the Fed has taken over the past several months.
Further adding urgency to the current inflation situation is exactly which prices are increasing.
A major takeaway from Thursday’s report is that the biggest contributors to the price increases in this month’s report are all necessities — food, electricity, and shelter.
Used car prices have increased by a mammoth 40.5% since last year, while energy prices rose by 27%. Food prices are also up significantly. Bacon and steak prices are up 18% and 17%, respectively, while staples such as peanut butter and eggs have also experienced double-digit increases.
“That is what is really squeezing household budgets. This is not something that is limited to discretionary spending,” McBride said.
The Fed is behind the curve on inflation, but not irreparably so, said McBride, who argued that the bulk of the inflationary pressure has been the result of supply chain problems, which the Fed has no role in fixing. Raised interest rates will help quash demand and thus push down prices, but only to a limited extent if supply chain issues remain persistent, he said.
If the Fed decides to take a more strident approach to monetary policy as a result of the hot inflation, it will lead to increased volatility in the markets, meaning that stock prices will probably go down. Even with less-than-stellar stock movement, protecting the economy from spiraling inflation is healthier for the country in the longer term.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
Biden has also been feeling the sting from inflation. While the Fed’s ability to alter the federal funds rate is something that it alone can do, some have blamed massive fiscal spending during Biden’s first year in office for further pushing inflation higher.
“On higher prices, we have been using every tool at our disposal, and while today is a reminder that Americans’ budgets are being stretched in ways that create real stress at the kitchen table, there are also signs that we will make it through this challenge,” Biden said after the report. “My administration will continue to be all hands on deck to win this fight.”
