Dilemma for Fed chief: High inflation and a surging virus

Not long ago, anticipation was high that Federal Reserve Chair Jerome Powell might begin to sketch out a plan this week for the Fed to start pulling back on its support for an economy that has been steadily strengthening.

That was before COVID-19 cases began accelerating across the country. Now, the decision of how and when the Fed should begin dialing back its help for the economy has become a more complicated one.

Yet in outlining his view of the economy and the threats it faces in a high-profile speech Aug. 27, Powell may provide important clues to the timing of changes in the Fed’s ultra-low-interest rate policies.

The big question has been when the Fed will begin to slow its purchases of Treasury and mortgage bonds. The Fed has been buying $120 billion in bonds each month since the pandemic erupted in March 2020 to try to keep longer-term rates low and encourage borrowing and spending. It has also pegged its short-term benchmark interest rate at nearly zero since then.

Powell will be speaking on Aug. 27 at an annual conference of academics and central bankers. The conference, sponsored by the Federal Reserve Bank of Kansas City and normally held in Jackson Hole, Wyoming, will instead be a virtual-only event for a second straight year. A surge of COVID-19 cases near the Wyoming resort delivered a direct impact on the Fed itself by forcing a last-minute cancellation of its in-person plans.

The hasty shift to an online event reflects the rapid rebound of the pandemic, led by the delta variant, particularly in the South and Northwest. It follows a sharp decline in confirmed cases earlier in the summer that had raised hopes that the coronavirus and its economic impact might be fading.

The uncertainties raised by the delta variant make it likelier that the Fed will announce a tapering in November or later, economists said, rather than in September. That would allow Fed officials to consider two additional months of data on inflation and jobs to gauge the delta variant’s impact.

The resurgence of the virus is hardly the only complicating factor facing the Fed. Inflation has surged to a three-decade high as a sharp rebound in consumer spending and shortages in many commodities and parts, such as semiconductors, have sent prices rising for airline tickets, hotel rooms, new and used cars and restaurant meals. The Fed’s preferred inflation gauge jumped 3.5% in June compared with a year earlier, the biggest such rise since 1991.

Higher inflation has, in turn, intensified pressure on Powell and the Fed to rein in their stimulus policies. Powell, though, has consistently expressed confidence that higher inflation will prove temporary, even if it persists for several more months. Many economists and Wall Street investors agree. Some, in fact, are more concerned about the opposite problem: That inflation will decline too far from its current level.

Fed officials had expected much more clarity around the economy and job market by early fall. As the pandemic faded, more Americans would return to work, instead of shying away out of fear of viral infection. Now the delta variant could prolong that fear and postpone the point at which the Fed can get a clear read on the job market.