Fear of the Fed Matchmaker: Stagnant Economy Meets Higher Interest Rates | Local company

WASHINGTON — The Federal Reserve plans to raise interest rates in March on the assumption that the U.S. economy will largely avoid fallout from the omicron variant of the coronavirus and continue to grow at a healthy pace.

As financial markets quickly adjust to expectations of an ever more aggressive fight against inflation by the Fed, year-end data showed weaker-than-expected results for some of the inflation measures that the US central bank is watching closely, reminding how uncertain its final policy is. path remains.

The numbers were still high, with the Employment Cost Index, the broadest measure of labor costs, up 4% on an annual basis in the fourth quarter, the biggest increase since 2001 , and the personal consumption expenditure price index jumping 5.8. percent on an annual basis in December, the largest annual increase since 1982 and nearly triple the Fed’s 2% inflation target.

But the pace of change from previous periods has slowed, and while investors and many analysts continued to expect more and faster Fed rate hikes this year, some added a footnote .

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Slowing employment cost growth, for example, has been a “big step in the right direction” for Fed officials who expect price trends to subside on their own. same, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

While Fed Chairman Jerome Powell and other U.S. central bank officials have pointed to the risk that inflation will prove higher and force them to raise borrowing costs faster than expected, Shepherdson , in recent forecasts, sketched an opposite view: of an economy that plateaus due to the coronavirus pandemic in the first three months of 2022, loses jobs in January and February, and produces inflation that ” down sharply” in the second quarter, just as the Fed is likely gearing up for its rate hikes.

This scenario, out of step with investors expecting five rate hikes this year and some forecasters who have gone as high as seven, shows the degree of uncertainty still in play about the direction of the economy and the Fed’s reaction.

“No roadmap”

An interest rate hike at the Fed’s March 15-16 monetary policy meeting is virtually assured at this point. But even the size of that hike is up in the air, as some analysts expect the Fed, rather than the usual quarter-percentage-point rate hike, to opt for a larger half-percentage-point hike. -percentage point to tighten credit more quickly and demonstrate its seriousness. in lower inflation.

However, much depends on the behavior of the economy, inflation, financial markets and the virus in the coming weeks.

Major U.S. stock indexes were trading higher on Friday, punctuating a week of heavy losses. Earlier in the day, the U.S. Commerce Department reported that consumer spending fell in December, a weakness that may have continued into January given the massive outbreak of new coronavirus cases.

Consumer confidence continued to decline at the start of the year, hitting the lowest point in a decade, according to the University of Michigan’s closely watched indicator of US consumer confidence. Survey director Richard Curtin said the combination of Omicron, high inflation and the constant dose of news about future Fed rate hikes could trigger a negative consumer reaction – a blow possible to economic growth on top of what is already happening through lower public spending.

“The danger is that consumers will overreact to these little nudges,” Curtin said.

This could contribute to inflation, at least some of which has been driven by strong demand for goods during the pandemic, but the Fed could draw a fine line between what is needed to temper prices and what would be an overshoot.

“Panic within the ranks of the Fed has begun to set in. The challenge now is to rein in inflation without letting the flame of the global economy go out,” wrote Diane Swonk, chief economist at Grant Thornton. , a professional services company. “There is no roadmap to do this after inflation has increased.”

Bond markets showed some signs of caution on Friday. Yields on US Treasuries fell and the spread between longer-term and shorter-term securities narrowed – often seen as a loss of confidence in future economic growth, lower inflation, or both.

Either way, said Minneapolis Fed President Neel Kashkari, that’s one reason the U.S. central bank may not need to “bring the brakes hard” with aggressive rate hikes. .

Despite the Fed’s seemingly hawkish positioning, Kashkari told NPR on Friday that the goal was not to constrain the recovery but to “take your foot off the gas a bit.”

Additional reporting by Ann Saphir.