The Federal Reserve has significantly increased its expectations for inflation this year following massive government spending from Democrat President Joe Biden.
On Wednesday, The Federal Reserve “considerably raised its expectations for inflation this year and brought forward the time frame on when it will next raise interest rates,” CNBC reported. “However, the central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program, though Fed Chairman Jerome Powell acknowledged that officials discussed the issue at the meeting.”
Officials said that increases in interest rates could come as soon as after the 2022 midterms in 2023. However, they previously said that interest rates would not increase until at least 2024.
“This is not what the market expected,” James McCann, deputy chief economist at Aberdeen Standard Investments, told CNBC. “The Fed is now signaling that rates will need to rise sooner and faster, with their forecast suggesting two hikes in 2023. This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary.”
“If you’re going to get two rate hikes in 2023, you have to start tapering fairly soon to reach that goal,” Kathy Jones, head of fixed income at Charles Schwab, told CNBC. “It takes maybe 10 months to a year to taper at a moderate pace. Then you’re looking at we need to start tapering maybe later this year, and if the economy continues to run a little bit hot, rate hikes sooner rather than later.”
CNBC reported earlier this week that Americans’ fear of inflation hit an all-time record high as “the expectation is that the inflation rate will be up to 4% one year from now.”
JPMorgan Chase CEO Jamie Dimon warned that there is a very high likelihood that the inflation will not be temporary as the Biden administration has been trying to claim it will be.
Dimon said, “[Our bank has] a lot of cash and capability and we’re going to be very patient, because I think you have a very good chance inflation will be more than transitory.”
“If you look at our balance sheet, we have $500 billion in cash, we’ve actually been effectively stockpiling more and more cash waiting for opportunities to invest at higher rates,” Dimon said. “I do expect to see higher rates and more inflation, and we’re prepared for that.”
Larry Summers, who held top economic positions in the Clinton and Obama administrations, told PBS’s “Firing Line with Margaret Hoover” last week that the enormous amount of spending that Biden has done risks melting down the economy if it overheats.
“If you looked at how the economy was coming into this year, we had total wages and salaries coming to people were 20 or 30 billion dollars a month lower because many of them had to be home because of COVID and the economy was slowed,” Summers said. “But we put in a stimulus that was putting into the economy more than 200 billion dollars a month. And so when you take a hole and you overfill it, you’re likely to have problems.”
“And I think we know that inflation’s like a lot of other things, it’s a lot easier to prevent than it is to cure,” he continued. “And I think the credibility of policymakers, including those at the Fed, is much easier to preserve than it is to restore.”
“The main risk is that our economy’s going to overheat,” he later added. “And then once it overheats, it’s going to be hard to put out the fire without doing a lot of damage and causing a lot of problems. And so I’d like to see us shift towards a policy concern. I mean, let me give you another example.”