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Fed Says High Inflation, Geopolitics Are Clouding Outlook

By Jonnelle Marte

The U.S. economy grew at a moderate pace through mid-April, but rising prices and geopolitical developments created uncertainty and clouded the outlook for future growth, the Federal Reserve said. 

Photo by Clay Banks on Unsplash

“Inflationary pressures remained strong since the last report, with firms continuing to pass swiftly rising input costs through to customers,” the U.S. central bank said in its Beige Book survey released Wednesday. “Outlooks for future growth were clouded by the uncertainty created by recent geopolitical developments and rising prices.”

The report was based on anecdotes collected by the Fed’s 12 regional banks through April 11 and compiled by the Federal Reserve Bank of Minneapolis.

The Fed is in the process of making a hawkish pivot as it battles the highest inflation in four decades, with officials raising rates and preparing to shrink the central bank’s nearly $9-trillion balance sheet. Policy makers have said they will move “expeditiously” to lift rates back to a “neutral” level that neither stimulates nor slows the economy. Fed officials are debating whether they will need to raise them above neutral — estimated to lie around 2.4%– and by how much.

A number of Fed officials have said they are open to delivering a 50-basis-point increase when they meet in May, a move that is fully priced into money markets. St. Louis President James Bullard on Monday said a 75-basis-point move should not be ruled out if needed, although it wasn’t his base case.

U.S. central bankers say they can slow price increases without causing a downturn, but that goal may be more difficult if supply-chain disruptions caused by the pandemic persist.

The rising cost of supplies is pushing some firms to lift their prices, the Fed report found. For example, many businesses in the New York district said input costs were rising for a “wide range of supplies,” and expected to increase further. “A large and growing share of businesses plan to increase their selling prices in the months ahead,” the Fed said. 

Some businesses said a shortage of available workers made it difficult for them to recruit and retain staff, even after boosting wages. In the Cleveland district, some employers said they expected pay to rise further this year, but some firms said prior wage increases “had not led to improvements in hiring or retention rates, and they could not afford to increase pay further.” Problems with labor retention were mentioned by several of the regional Fed banks.

Businesses in the Minneapolis district reported that “rapid wage inflation” was increasing turnover among lower-wage positions, and some contacts said they were considering automation to cope with “growing wage pressure and lack of workers.”

Some employers went to new lengths to draw workers back to the office by holding seminars and introducing new perks. One major corporation in the St. Louis district introduced a coffee shop, an arcade area and more collaborative workspaces to encourage more people to come into the office.

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