THE U.S. Federal Reserve is pivoting hard from a patient approach to pulling back support for the U.S. economy.

Fed officials had charted a much faster return from the unprecedented stimulus they deployed at the onset of the coronavirus pandemic than they’d initially planned. The bank’s policymaking committee announced it would aim to end its monthly purchases of Treasury and mortgage bonds by March, and expects to hike interest rates roughly three times by the end of 2022.

The Fed has held off on reducing stimulus even as inflation rose for much of this year. Millions of U.S. workers remained on the sidelines for more than a year and officials were reluctant to cut support, expecting more Americans to return to work as the pandemic eased and fiscal stimulus faded.

But Fed officials have acknowledged they no longer have time to hold out for a mass return to the labor market with inflation reaching its highest level in more than 40 years.

“The reality is we don’t have a strong labor force participation recovery yet, and we may not have it for some time,” Fed Chair Jerome Powell said at a press conference following the December meeting of the Federal Open Market Committee (FOMC), which sets monetary policy.

“At the same time, we have to make policy now and inflation is well above target. So this is something we need to take into account,” he continued.

By slashing interest rates to near-zero levels in March 2020, buying trillions of dollars in bonds, and deploying billions in emergency loans, the Fed helped power a surprisingly strong recovery from the worst economic shock in a century. The jobless rate dropped to 4.2 percent in November, growth is on track to exceed 5 percent, and layoffs have fallen to the lowest level in more than 50 years.

The Fed’s response — along with more than US$5 trillion in fiscal stimulus and the breakthrough of mRNA coronavirus vaccines — was a key force behind a far faster recovery than many economists anticipated.

Even so, the pace of that rebound has overwhelmed supply chains with intense demand for goods and stoked inflation higher. At the same time, the labor force participation rate remains 1.5 percentage points below its pre-pandemic level.

Typically after a major economic shock, “there aren’t enough jobs and people can’t find jobs and we’re stimulating demand and trying to get demand to come up. That’s not the problem here. The problem is a supply-side problem,” Powell said.

Consumer spending has risen above pre-pandemic levels, but remains disproportionately focused on goods instead of services and activities with more face-to-face exposure.

(SD-Agencies)