(PresidentialWire.com)- Officials with the Federal Reserve are doing their best to maintain that balance between giving the U.S. economy as much time as needed to bring back jobs that have been lost since the start of the pandemic, and at the same time making sure inflation is contained.
They are facing challenges doing so, though, as wage and price increases continue to run at highs that haven’t been seen in the last few decades.
On Monday, investors continued to say that this persistent and high inflation will soon force the Federal Reserve to increase interest rates before they ideally would want to, and at faster rates than many policymakers have said.
The CME Group’s FedWatch data shows that contracts in federal funds futures currently imply three separate rate increases of a quarter-point in 2022. That’s compared to the projection of only two such increases that was made at the end of last week.
At the same time, pressures on prices are continuing to increase. Manufacturing companies are shouldering input costs that are much higher than before, forcing the Institute for Supply Management’s Price Index to continue a sharp increase.
Many policymakers have said they would like to not raise interest rates just yet, staying patient as the economy continues to rebound. But, that window in which they could hold off on doing so might be coming to a close, according to Goldman Sachs economists.
In fact, that large firm moved their rate hike call one full year ahead — to July of next year.
By that point in time, Jan Hatzius, an economist at the firm, said he expects inflation to remain above 3%. If that proves to be true, it would be an inflation run that hasn’t been seen in the U.S. since early in the 1990s. It’s also much higher than the 2% target the Fed sets for inflation.
It’s also unlikely that the job market would have recovered to levels seen before the pandemic started. That means it would be short still of the “maximum employment” promised by the Fed to restore before they increase interest rates.
The team at Goldman Sachs wrote that by that point, officials with the Fed would probably “conclude that most if not all of the remaining weakness in labor force participation is structural or voluntary,” then proceed with increasing rates to ensure inflation stays under control.
As the team at Goldman Sachs wrote:
“Since the (Federal Open Market Committee) last met in September, the unemployment rate has fallen further, average hourly earnings and the employment cost index have posted strong increases, inflation has remained high.”
They are seemingly challenging the narrative being pushed by the Fed that inflation would ultimately pass by on its own, with no need to increase interest rates so as to tighten conditions for credit and, as a result, slow household and business purchases.
This week, the Fed is scheduled to meet, and issue a potentially new statement on policy.