The Federal Reserve (FED) may soon begin to lift some of its easy money policies adopted at the start of the pandemic by COVID-19 to stimulate the U.S. economy during its sharpest recession since 1948; or at least, so warns the latest analysis from The Wall Street Journal.
In March 2020, the FED cut interest rates to near zero and initiated a program of purchases of nearly more than $120 billion in Treasury bonds and government-backed mortgages to provide additional liquidity to the economy. Since last year FED officials have warned that they will continue the purchase program until substantial progress has been made.
The Wall Street Journal warned, for the time being, that the FED would move to limit the purchase of more debt bonds in the future precisely because of the inflationary pressures that could be causing so much cash to flow into the market.
However, in a virtual conference on Wednesday last week, FED Chairman Jerome Powell warned that the central bank had no intention of raising interest rates in the short term and that interest rates, for the time being, will remain near zero until 2023.
The FED’s goal is to continue monetary stimulus until the U.S. returns to its natural unemployment rate. However, there is panic in the markets that monetary stimulus could come at the cost of a spillover of inflation. Powell recently admitted in an interview that in the U.S. “Inflation could be higher and more persistent than we expect”.
Cumulative inflation for the year to May totaled 5.6%, well above what the U.S. economy is accustomed to.
Why is inflation rising in the United States?
Despite the high inflation, it should be kept in mind that prices during the pandemic experienced a slight drop, coupled with an economic depression, so part of the price increase is a result of the lifting of restrictions.
Another part of the increase is due to bottlenecks in the supply chains in the United States. To begin with, there is the shortage of semiconductors or microchips around the globe.
With quarantines and telecommuting came increased demand for the Internet, as well as other digital services such as cloud computing so that employees could continue to work but from home. This increased demand for processing power requires semiconductors that are manufactured only in some parts of the world.
Thus, the shortage of semiconductors also affected automobile manufacturing, so that the cost of new cars has risen over the last few months, as well as that of second-hand cars.
On the other hand, the reopening also caused the demand for fuels to increase, however, due to exceptional problems such as the hacking of the Colonial pipeline or the blockade of the Suez Canal and, more importantly, the impossibility to start new hydrocarbon extraction projects during 2020 generated that gasoline, diesel and gas prices have also experienced a more pronounced increase during 2021.
The low interest rates imposed by the FED stimulate cheap credit, so younger people have ventured into buying homes, however, the United States is also experiencing a shortage of up to 5 million homes, so the price has climbed to historic highs, which triggered a higher cost of leases.
Finally, labor shortages in sectors such as construction and transportation are also driving up the operating costs of businesses, so it is expected that food companies will soon raise their prices to the public in order to be able to afford their operations. Inflation has already arrived in the United States and according to the Chairman of the FED, it will stay for a while.