The Federal Reserve is caught in a delicate balancing act as it tries to steer the country out of an unprecedented pandemic.
On one side, the Fed feels the economy still needs help given that the U.S. has yet to recover nearly 5 million jobs that were lost during the pandemic.
But the Fed is also facing another opposing problem: Inflation has climbed to its highest level in three decades as Americans have gone on a spending spree that has sparked widespread shortages.
For now the Fed is straddling a middle line, as it navigates the uneven economic recovery.
At their meeting on Wednesday, Fed policymakers are expected to leave interest rates near zero, as part of a long-term strategy to get the country back to full employment.
But the central bank is also likely to announce a plan to start winding down another effort it undertook to help the economy through the pandemic: its purchases of at least $120 billion worth of bonds each month.
That policy was designed to help keep borrowing costs across the economy low, since bond markets help determine the rates consumers pay for auto loans and home mortgages. The Fed is expected to phase out the bond purchases by the middle of next year.
"I do think it's time to taper [the bond buying program]," Powell said recently, at a conference sponsored by the South African Reserve Bank. "I don't think it's time to raise rates."
Will the Fed's plan work?
Whether the Fed can successfully straddle that middle line is uncertain given that inflation has proven to be more stubborn than many forecasters expected.
Consumer prices, as measured by the Fed's preferred yardstick, were 4.4% higher in September than they were a year ago. That's the highest annual inflation since 1991, and more than double the Fed's long-term target of 2%.
Powell and others have argued that upward pressure on prices is largely the result of "transitory" factors tied to the pandemic, which should ease over time.
The problem is that while prices for some commodities have fallen, many supply chain bottlenecks have persisted, and in some cases gotten worse.
"We now see higher inflation and the bottlenecks lasting well into next year," Powell acknowledged at the conference by the South African central bank.
A survey of U.S. factory managers last month found many struggling to find parts and raw material – and enough workers – to keep pace with booming demand. Faced with higher costs on all fronts, one furniture factory said it was considering its third price increase this year.
Workers' pay is also rising, though not as fast as prices. On average, wages and salaries in September were 4.2% higher than a year ago.
Powell said he and his colleagues are on the lookout for the kind of wage-price spiral that led to runaway inflation in the 1970s, but he doesn't see evidence of that so far. If it were to materialize, Powell has said, the central bank is prepared to raise interest rates.
The Fed faces plenty of inflation critics
Some economists — including Lawrence Summers, who served in the Obama and Clinton administrations — warn the Fed is underestimating the danger of inflation. They worry that failure to restrain prices now could force a more painful crackdown later.
Powell, however, is sticking to his cautious timetable.
"No one should doubt that we will use our tools to guide inflation back down to 2% over time," he said at the conference. "For now, we think we can be patient and allow the labor market to heal, which we expect it to resume doing fairly shortly."
The path back to full employment has been rocky. Many employers are eager to hire, but after adding about a million jobs in both June and July, job gains slowed sharply in August and September.
There were 3 million fewer people working or looking for work in September than there were before the pandemic. Some people retired. Others were busy caring for children or worried about catching COVID-19.
Getting back the missing workers
Now that schools have reopened and the health outlook is improving, the Fed is counting on many of those people to rejoin the workforce, relaxing pressure on both wages and prices.
That's not a sure thing, though. And the longer it takes for the workforce to rebound, the more inflationary heat the Fed may be feeling.
"I think the biggest question out there right now is where are all these missing workers?" asked Nela Richardson, chief economist at the payroll processing company ADP. "How long will they stay missing? And what will entice them to come back into the labor market?"
For now, the Fed is willing to tolerate a period of higher inflation in an effort to promote full employment.
But if the central bank concludes the pandemic has permanently lowered the bar of what full employment looks like, the Fed's balancing act could shift, towards a faster increase in interest rates and a tougher crackdown on inflation.
Powell has acknowledged the challenging task.
"We live in a risk management business," Powell said recently, "not one of absolute certainty."
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