Why critics fear the Fed’s policy change will prove late and abrupt

This caused the Fed to change course late last year – and to do so quite abruptly.

“Inflation really erupted in the late spring of last year, and we felt – it was very, very widely held in the forecasting community – that it would be temporary,” Mr Powell said. in December. But officials grew more concerned as data on employment costs rose and inflation indicators showed warm readings, he said, so they pivoted on policy.

“It was basically higher and faster inflation, which turns out to be much faster, progress in the labor market,” Powell said.

Asset prices have been swinging in recent weeks as investors try to figure out the Fed’s new stance and what it will mean for the economy. Stocks generally fell, Bitcoin prices fell, and bond prices rose amid the cacophony.

If the Fed had changed course earlier, “there wouldn’t be this feeling that the Fed is behind the curve, and this fear in the market that it’s going to go aggressive,” Jefferies’ Ms. Markowska said.

Part of the challenge is that while the central bank has clearly detailed a plan for when it will slow bond buying and raise rates – outlining the conditions it would like to see – it hasn’t been so clear about its follow-up actions.

El-Erian thinks the Fed should quickly stop buying bonds while clearly signaling the way forward for rate hikes. Otherwise, he said, officials risk having to withdraw support in one fell swoop later this year.

But there are also arguments for gradualism.

Foreign economic officials are nervously watching the Fed’s path, especially when other central banks are also withdrawing support amid a widespread price spike – the Bank of England, for example, has already hiked rates from interest. When major economies increase domestic borrowing costs, it can lead to capital flight from emerging markets, disrupting exchange rates and hurting or destabilizing their economic growth.

“If major economies hold back or turn around in their monetary policies, there will be serious negative fallout,” Chinese President Xi Jinping said during a speech this month, warning of “challenges ahead.” global economic and financial stability”. ”

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