BUSINESS AND TRANSPORTATION

As the Fed Prepares to Slow Support, Attention Shifts to Rate Increases

The Federal Reserve is expected to announce a plan to taper off its bond buying. With inflation surging, economists’ eyes are already turning to rates.

Jerome H. Powell, the Federal Reserve chair, is on the cusp of accomplishing something that would have seemed like a victory a year ago: Central bankers are expected to announce a plan to wean the economy off their asset-buying program on Wednesday without roiling markets, a delicate maneuver that was in no way assured. Instead, Mr. Powell and his colleagues face pressing questions about their next steps.

Inflation is running at its fastest pace in roughly three decades, and hopes that the jump in prices will quickly fade have dimmed as supply chain snarls deepen and fuel costs rise. Wages are increasing swiftly, and consumers and businesses are coming to expect faster price increases, pumping up the risk that high inflation will become a fixture as employers and workers adjust their behavior.

Though the Fed is expected to announce this week that it will slow the $120 billion in asset purchases it has been carrying out each month to support the economy, Wall Street economists have already turned their attention to how worried the central bank is about brisk inflation and whether — and when — it might start raising interest rates in response. “The question in the mind of the market is 100 percent what comes next,” said Roberto Perli, a former Fed economist who is now head of global policy at Cornerstone Macro.

Slowing bond buying could lead to slightly higher long-term borrowing costs and take pressure off the economy at the margin. But raising interest rates would likely have a more powerful effect when it comes to cooling off the economy. A higher federal funds rate would cause the cost of buying a car, a house or a piece of equipment to rise and would slow consumer and business demand. That could tamp down price gains by allowing supply to catch up to spending, but it would slow growth and weigh on hiring in the process.

Leave a Reply

Your email address will not be published. Required fields are marked *