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By Christopher Rugaber<\/div><\/div>\n

When will interest rates go up? The Federal Reserve might weigh in, but it still says that inflation is a temporary problem caused by supply-chain bottlenecks.<\/span><\/span><\/p>\n<\/div>\n

WASHINGTON (AP) \u2013 With inflation rising in a fast-rebounding economy, the Federal Reserve is poised this week to discuss when it will take its first steps toward dialing back its ultra-low interest rate policies.<\/span><\/span><\/p>\n

It will be a fraught discussion, one likely to occur over several months. Yet the escalating inflation that has forced consumers and businesses to pay more has intensified pressure on the Fed to ensure that rising prices don\u2019t become entrenched in consumers\u2019 outlooks. If Americans start to anticipate higher prices, they might take actions \u2013 such as accelerating their purchases before prices rise further \u2013 that could send inflation even higher.<\/span><\/span><\/p>\n

The Fed faces a dilemma: On the one hand, inflation is rising much faster than it had projected earlier this year, though the Fed has characterized the price pressures as \u201ctransitory,\u201d a consequence of supply shortages and a fast recovery. On the other hand, hiring has been slower than the benchmark that Chair Jerome Powell mentioned at a news conference after the Fed\u2019s most recent meeting in late April.<\/span><\/span><\/p>\n

Powell said at the time that he would want to see a \u201cstring\u201d of hiring reports showing about 1 million added jobs each month. The job market has yet to reach that total in any month this year, though employers have posted a record-high number of open jobs.<\/span><\/span><\/p>\n

With the economic picture still clouded by the chaos of reopening from the recession, no major decisions are expected Wednesday when the Fed\u2019s latest policy meeting ends and Powell holds a news conference. The Fed is set to keep its key short-term rate near zero and to continue buying $120 billion a month in Treasury and mortgage bonds. Those purchases are intended to keep longer-term rates low to encourage borrowing and spending.<\/span><\/span><\/p>\n

But the Fed\u2019s policymaking committee appears likely to start discussing the timing and mechanics of gradually reducing its bond purchases. Communicating that decision to the public will be a sensitive task.<\/span><\/span><\/p>\n

If the Fed indicates that it will taper its purchases earlier than markets expect, it risks a repeat of the \u201ctaper tantrum\u201d in 2013. That occurred when then-Chairman Ben Bernanke jolted financial markets by suggesting that the Fed could taper its bond purchases \u201cin the next few meetings\u201d \u2013 sooner than traders had expected. Bernanke\u2019s remarks sent longer-term bond yields surging.<\/span><\/span><\/p>\n

Having learned from that incident, Powell will likely have any tapering action follow the Fed\u2019s 2017 decision to slowly reduce the bond holdings it had accumulated after the Great Recession. The first hint of that plan emerged six months before a final decision was made. Economists expect a similar timeline now, which suggests that any tapering won\u2019t occur before year\u2019s end.<\/span><\/span><\/p>\n

Last week, the government reported that inflation jumped to 5% in May compared with a year earlier \u2013 the largest 12-month spike since 2008. The increase was driven partly by a huge rise in used car prices, which have soared as shortages of semiconductors have slowed vehicle production. Auto rental companies have had to buy up used cars to rebuild their fleets, much of which were sold off in the pandemic.<\/span><\/span><\/p>\n

Other inflation drivers have included services, like airline tickets, car rentals and hotel rooms, for which prices had tumbled at the outset of COVID-19 outbreak and are now regaining pre-pandemic levels. The reopening of the U.S. economy has also forced up prices for clothing, as more people return to work in person. Such price increases may not last.<\/span><\/span><\/p>\n

\u201cI think they still feel pretty strongly that what we\u2019re seeing is transitory,\u201d said Steve Friedman, an economist at investment firm Mackay Shields and a former senior staffer at the New York Federal Reserve Bank.<\/span><\/span><\/p>\n

Another key consideration is whether inflation persists long enough to affect the public\u2019s behavior. If Americans start expecting price increases, those expectations can become self-fulfilling.<\/span><\/span><\/p>\n

So far, bond yields and consumer surveys suggest that while higher inflation is expected in the short term, investors and most of the public expect only modest price gains in the long run. Powell has long maintained that the public\u2019s perceptions of future inflation evolve only slowly.<\/span><\/span><\/p>\n

\u201cThe sharp temporary increases in some categories of goods and services seem unlikely to leave an imprint on longer-run inflation behavior,\u201d Lael Brainard, one of six governors on the Fed\u2019s board, said earlier this month.<\/span><\/span><\/p>\n

As a result, the policymakers may begin discussing a tapering of their bond purchases this week. But several more months will likely elapse before a decision is made.<\/span><\/span><\/p>\n

\u201cWe have to be thinking ahead, planning ahead, and so I do think it makes sense for us to be thinking through the various options that we may have in the future,\u201d John Williams, president of the New York Federal Reserve, said in an interview with Yahoo Finance early this month.<\/span><\/span><\/p>\n

At the same time, Williams, who is seen as close to Powell, said that \u201cto my mind, we\u2019re still quite a ways off from reaching the substantial further progress that we\u2019re really looking for\u201d to start slowing the bond purchases.<\/span><\/span><\/p>\n

Another challenge is that the Fed officials have never defined what \u201csubstantial further progress\u201d toward its dual goals of full employment and inflation at or slightly above 2% would look like.<\/span><\/span><\/p>\n

That\u2019s one issue that policymakers will need to discuss, Friedman said, along with how quickly they will reduce their bond purchases once the tapering begins. Another is whether they should reduce their purchases of Treasury and mortgage bonds at the same pace. Some economists favor sharper reductions to purchases of mortgage bonds, which, they argue, now provide an unnecessary boost to the housing market.<\/span><\/span><\/p>\n

On Wednesday, the Fed will also update its quarterly economic and interest rate projections. Many economists expect the officials to signal that they expect to start raising their benchmark rate in late 2023. That would mark a shift: The policymakers\u2019 previous forecast in March had shown no rate hike through 2023.<\/span><\/span><\/p>\n

Fed officials will also likely sharply increase their forecast for inflation this year, but only slightly for the following two years, to show that they expect price increases to wane.<\/span><\/span><\/p>\n

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\nAuthor: kerrys<\/p>\n","protected":false},"excerpt":{"rendered":"