Raging inflation may cause upswing in US interest rates

Global financial system is eagerly watching the next move of the US Federal Reserve on tackling inflation, with recent official data showing prices rose 5% over the past year, marking the highest inflation rate since 1990.The US central bank officials at their meeting earlier this month expressed concern about inflation and said they would be willing to raise interest rates, if prices keep rising.They stressed a “patient” approach regarding incoming data, which has shown inflation running at its highest pace in more than 30 years.But officials also said they would “not hesitate to take appropriate actions to address inflation pressures that posed risks to its longer-run price stability and employment objectives.”The durability and broadening in price pressures seem to have taken the White House and the Fed by surprise and prompted both to respond. US President Joe Biden and Fed Chair Jerome Powell stressed they would take steps to tackle the rising costs of everyday items, including food, gasoline and rent.Although the surge in inflation in late spring and over the summer was portrayed as transitory, concern within the Fed has mounted as readings have continued to remain elevated into the fall, according to Reuters.“Various participants noted that the (policy-setting) Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives,” the Fed said in the minutes.Fed policymakers unanimously decided at last month’s meeting to begin reducing the central bank’s $120bn in monthly purchases of Treasuries and mortgage-backed securities, a program introduced in early 2020 to help nurse the economy through the Covid-19 pandemic.Powell, speaking after President Biden picked him for another four years at the helm, said policy makers “will use our tools both to support the economy and a strong labour market, and to prevent higher inflation from becoming entrenched.”The minutes showed that officials “generally continued to anticipate that the inflation rate would diminish significantly during 2022,” while “many participants pointed to considerations that might suggest that elevated inflation could prove more persistent.“With the latest data suggesting that fourth-quarter GDP growth could be as strong as 6.5% annualised, we expect more officials to jump on that bandwagon,” said Paul Ashworth, chief US economist at Capital Economics. A number of other policymakers at the Fed’s November meeting, however, still advocated for a more patient approach, wanting more data in hand, although all agreed the Fed “would not hesitate to take appropriate actions to address inflation pressures that posed risks to its longer-run price stability and employment objectives.”Federal Reserve officials at their last meeting were reportedly open to removing policy support at a faster pace to keep inflation in check, even before data showed price pressures accelerating.But with further robust economic data released over the past three weeks, all signs point to an acceleration of the bond-buying taper now being firmly on the table at the Fed’s next policy meeting in mid- December.