WASHINGTON/SAN FRANCISCO- A US Federal Reserve divided over how to respond to fast-rising prices meets this week with the fresh complication of increased coronavirus infections and a global supply chain that, far from sorting out its problems, may be headed for more inflation-inducing trouble.
Fed officials are likely to affirm after their two-day meeting that a strong US recovery and their planning for an eventual policy shift both remain underway. But the new risks, threatening the twin ills of slowed growth and higher prices, mean the rosy future seen in June seems less assured.
Debate over how to shape post-pandemic monetary policy has just begun, and decisions were not expected before the fall.
But since the Fed met just six weeks ago, what had seemed a blue-sky setting for that debate has become clouded by a quadrupling of daily infections led by the more-contagious Delta variant to levels approaching those seen in last summer’s virus surge.
Even if the worst of the new outbreak is concentrated among less-vaccinated communities, economists see it potentially changing consumers’ willingness to spend and travel, and say it will likely require the Fed to strike a balance between keeping faith in the recovery while taking explicit stock of what could go wrong.
So far, the risks to growth remain just that: Data on air travel and restaurant visits show consumers are still in recovery mode, not hunkering down.
A new policy statement is to be issued Wednesday at 2 p.m. (1800 GMT) followed by a press conference by Fed Chair Jerome Powell.
“Again and again we’ve seen over the last 18 months that the No. 1 determinant of economic activity is the virus,” said Karen Dynan, a Harvard University economics professor and former assistant US Treasury Secretary. “I think that we will continue to make forward progress, but that progress will be slower than otherwise.”
Developments since the last meeting “strengthened the case against pulling back on accommodation prematurely,” given the new uncertainty about the recovery and despite higher-than- expected June inflation, Goldman Sachs economist David Mericle wrote.
