Powell said in congressional testimony two
weeks ago that the Fed would likely speed up
the reduction, or tapering, of its bond purchases.
Economists now expect the tapering to end by
March, instead of the previous timeline Powell
had set of June. Doing so will allow the Fed to
begin raising rates earlier next year if it chooses
to do so to fight inflation.
“Price increases have spread much more
broadly in the (most) recent few months across
the economy, and I think the risk of higher
inflation has increased,” Powell said at a Senate
committee hearing Nov. 30.
The shift away from ultra-low rates to tighter
credit policies carries significant risks. Raising
borrowing costs too quickly could stifle
consumer and business spending. That, in turn,
would weaken the economy and likely raise
unemployment. Yet if the Fed waits too long to
raise rates, inflation could surge out of control.
It might then have to act aggressively to tighten
credit and potentially trigger another recession.
For now, some economists say, the Fed is unlikely
to harm the economy anytime soon, even as it
rapidly reverses its efforts to boost growth.
“They’re so far behind the curve, all they’re
doing is taking their foot off the accelerator,
rather than pressing on the brake,” said Paul
Ashworth, chief U.S. economist for Capital
Economics, a consulting firm.
With consumer inflation high — it reached 6.8%
in November, compared with a year ago, the
highest since 1982 — inflation-adjusted rates
are lower than they were, for example, a year
ago, when the economy was in much worse
shape. Even when the Fed begins raising rates,