Rising inflationary pressures are likely to keep the Federal Reserve on its gradual path out of its pandemic-era policies of extraordinarily easy money, as central bank officials begin to ratchet up their discomfort with the duration of high readings on prices.
On Friday morning, the Bureau of Labor Statistics reported that the Consumer Price Index rose by 6.8% on a year-over-year basis in November, the fastest pace since 1982.
The price increases were broad-based across categories, with food prices rising 0.7% month-over-month, gasoline up 6.2%, and owners’ equivalent rent rising 0.4%.
Fed watchers suggested that the number was not a surprise that would force policymakers to rethink their discussion over accelerating the winddown of the Fed’s quantitative easing program.
“Strong persistent inflation pressures reflected in the reading support a continued Fed hawkish pivot,” BofA Securities U.S. economist Alexander Lin wrote in a note on Dec. 10.
Hawkish tilt
The “hawkish pivot” concerns commentary from Fed Chairman Jerome Powell and other Fed officials regarding a faster timeline to stop its purchases of assets in the open market. Up until the beginning of November, the Fed was buying $120 billion a month in U.S. Treasuries and agency mortgage-backed securities to signal its support of the economic recovery.
Although the Fed set a course to gradually bring those purchases to a stop by the middle of next year, Powell suggested in late November that rising inflationary pressures may support expediting that process.
“We now look at an economy that is very strong and inflationary pressures that are very high and that means it's appropriate for us to discuss at our next meeting — which is in a couple weeks — whether it would be appropriate to wrap up our purchases a few months early,” Powell told Congress on Nov. 30.
That would give the Fed earlier optionality on raising interest rates from the current setting of near-zero, a policy it has held in place since the beginning of the pandemic to spur borrowing. Higher inflation readings through 2022 would further tilt the Fed’s hand into more quickly pulling back on those extraordinarily low and stimulative interest rates.
“With [year-over-year] inflation expected to increase slightly over the coming months and fall only relatively gradually in 2022, these worries in the political arena and inside the Fed will likely remain less-transitory than many had hoped,” wrote Krishna Guha and Peter Williams, Fed watchers at Evercore ISI.
Guha and Williams said the November CPI report "doesn't change [the] Fed view much," but said the central bank will be tested through the inflationary readings early next year.
An announcement on a faster Fed taper could come as soon as the central bank’s next policy-setting meeting on Dec. 14 and 15.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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