Economic Report: Economists says inflation risks highest in two decades and could force Fed to raise interest rates in 2022

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Federal Reserve leaders keep saying they don’t plan to raise rock-bottom U.S. interest rates for several years, but a growing number of economists think a speedier recovery and high inflation will force the central bank to act more quickly.

Some 46% of members surveyed by the National Association of Business Economists predict the Fed will lift a key short-term interest rate in 2022, at least a year before the central bank itself expects it will do so.

The central bank’s latest economic forecast predicts no increase in the so-called fed-funds rate until after 2023. The rate, which now sits close to zero, influences borrowing costs for consumers and businesses.

Although the central bank has held the fed-funds rate near zero throughout the pandemic, interest rates on U.S. Treasurys and mortgages have started to rise again owing to improvement in the U.S. economy and a snapback in inflation.

The yearly rate of inflation, which fell to almost zero last summer, has climbed close to 1.5% and is likely to top 2% later this year.

Some economists think inflation could go much higher owing faster growth, higher prices of business materials or limited supplies of key goods such as computer chips or lumber that are used in an array of products. New government stimulus totaling almost $2 trillion could also boost demand and put further strain on the cost of goods and services

“A majority of panelists believes that inflation risks are higher than in the past two
decades,” said Manuel Balmaseda, president of the NABE and chief economist at CEMEX.

The Fed is aiming for an inflation rate to average 2% over an unspecified period, using a price barometer known as the PCE. The index is the Fed’s preferred inflation gauge.

The Fed itself sees the yearly rate of PCE inflation climbing to as high as 2.4% this year dropping back down to 2% in 2022.

Thomas Barkin, president of the Richmond Fed, said increasing Wall Street

expectations of higher inflation are a natural reaction to an economy that is getting better. He called it a “good thing” as long as interest rates “don’t get out of whack.”

“Yields pop on good news. You ought to expect the market to adjust to news,” he said during an interview at NABE’s annual conference. “As the economy gets better you’d expect yields to rise.”

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