The Journal Gazette
Tuesday, January 11, 2022 1:00 am

Fed called lagging on price rises

Some economists allege tardiness feeds inflation


WASHINGTON – With inflation surging, unemployment falling and wages rising, some economists are warning that the Federal Reserve may have waited too long to reverse its ultra-low-rate policies – a delay that could put the economy at heightened risk.

On Wednesday, the government is expected to report that consumer prices jumped 7.1% over the past 12 months, which would be the steepest such increase in decades. Fed Chair Jerome Powell is sure to be grilled on the issue during a Senate hearing Tuesday on his nomination for a second four-year term. Inflation has become the most serious threat to the economy, a growing worry for the financial markets and a major political problem for the Biden administration and Democrats in Congress.

While Powell has many defenders who applaud the Fed's willingness to keep interest rates low to help reduce unemployment after the pandemic recession, Friday's U.S. jobs report for December raised alarms. It showed another sharp drop in the unemployment rate, an unexpectedly large increase in hourly pay and chronic labor shortages.

Though lower joblessness and higher pay benefit workers, they can also fuel rising prices. The jobs report led many economists to forecast more interest rate hikes this year than they had previously predicted as the Fed scrambles to manage a rapidly shifting economy. The Fed is now widely expected to begin raising rates in March – action that would, in turn, raise borrowing costs for many consumers and businesses.

By waiting as long as it has, the Fed might eventually be forced to accelerate its rate increases, effectively pressing harder on the economic brakes. Yet that could slow growth, disrupt financial markets and potentially cause a recession. Many past recessions have been caused by aggressive Fed rate hikes that were intended to combat or prevent inflation.

Last month, in a sharp pivot toward fighting inflation, the Fed signaled that it expects to raise its short-term benchmark rate, currently near zero, three times this year. As recently as September, policymakers had been divided over whether to raise rates even once in 2022.

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