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December 2, 2021

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Fed to tighten credit amid soaring inflation

Federal Reserve Chair Jerome Powell took a sharp and unexpected turn toward tightening credit for consumers and businesses in the face of mounting concerns about high inflation.

Powell signaled that the Fed will likely act more quickly to phase out its ultra-low-interest rate policies even as the emergence of the new Omicron variant of COVID-19 has raised fresh doubts about the future of the economy and the direction of inflation.

The Fed chair told the Senate Banking Committee that the central bank’s policymakers will discuss at their next meeting in mid-December whether to accelerate the reduction of their monthly bond purchases, which have been intended to lower long-term borrowing costs. The Fed just announced those reductions in early November at a pace that would end the bond buying in June.

But on Tuesday, Powell signaled that the Fed is inclined to end those purchases several months before then.

Doing so would put the Fed on a path to begin raising its key short-term interest rate as early as the first half of next year. That rate has been pegged at nearly zero since last March, when the coronavirus sent the economy into a deep recession. A higher Fed rate would, in turn, raise borrowing costs for mortgages, credit cards and some business loans.

The Dow Jones Industrial Average lost more than 650 points, or nearly 2 percent, for the day. Very low interest rates, nurtured by the Fed, have been a key factor in driving share prices to all-time highs since the pandemic struck.

“He was decidedly more hawkish in tone than I expected and, I think, than the financial markets expected,” said Kathy Bostjancic, chief US financial economist at Oxford Economics. Hawks generally favor higher borrowing costs to quell inflation, while doves emphasize lower rates to fuel hiring.

Fed policymakers have come under pressure from a sharp jump in inflation, with consumer prices soaring 6.2 percent in October from a year earlier, the highest rate in 31 years. In response, some Fed officials in recent weeks had already started to push for a faster tapering of the central bank’s bond purchases.

The sudden emergence of Omicron had led some Fed-watchers to speculate the central bank would avoid any major policy shifts until a clearer picture of its likely impact on the economy emerged. But Powell’s remarks — and the questions he faced from senators — were more focused on inflation than Omicron.


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