US growth seen capped at 2.5 pc next 2 years as inflation runs ‘too high’: Fed Official

Washington: US economic growth is expected to be capped at 2.5 per cent over the next two years due to inflation, which is currently “running too high,” Federal Reserve Bank of Philadelphia President Patrick Harker said on Tuesday. “I think growth will moderate this year,” Harker said. “We can probably expect to come in around […]

Washington: US economic growth is expected to be capped at 2.5 per cent over the next two years due to inflation, which is currently “running too high,” Federal Reserve Bank of Philadelphia President Patrick Harker said on Tuesday.

“I think growth will moderate this year,” Harker said. “We can probably expect to come in around 3 per cent to 3.5 per cent GDP growth this year – and then falling to trend [a] growth of 2 per cent to 2.5 per cent during the next couple of years.” Inflation, measured by the Consumer Price Index (CPI), grew 7 per cent in 2021 and 7.9 per cent during the year to February – both at their fastest in four decades. The CPI’s expansion outpaces GDP, or gross domestic product, growth at 5.7 per cent last year and projected by the Fed at 2.8 per cent this year.

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Policy-makers at the US central bank like Harker have a mere tolerance of 2 per cent for inflation per year and have vowed to bring inflation back to their target with a series of interest rate hikes through 2023.

“Inflation is running far too high, and I am acutely concerned about this,” Harker said. “Russia’s invasion of Ukraine will add to inflation pressure, not only hiking oil and gas prices but other commodities, like wheat and fertilizer, as well.” The Federal Reserve approved its first pandemic-era rate hike on March 16, raising rates by 25 basis points, or a quarter percentage point. Many of its policy-makers have said since that the March hike was too tame to fight inflation and that a more aggressive hike may be needed next as the central bank considers as many as seven rate adjustments this year.
Commenting on the forthcoming Federal Reserve action, Harker said he “wouldn’t rule out a 50-basis-point rate hike at the next meeting” of the central bank in May, although he would not commit to that at this point.

“I expect a series of deliberate, methodical hikes as the year continues and the data evolve,” Harker said. “I also anticipate that we will begin to reduce our holdings of Treasury securities, agency debt, and mortgage-backed securities soon.” Aside from keeping interest rates at almost zero for two years prior to its March rate hike, the Federal Reserve purchased USD 120 billion worth of bonds and assets for each month during that period to support the economy. Those asset purchases and others have added some USD 4 trillion to the central bank’s so-called balance sheet, which now stands at around USD 8.5 trillion. Federal Reserve officials have said they hope to trim that figure significantly over the next two years.

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