The Fed fears that the delta could prolong the shortage and keep inflation high until 2022

The biggest rise in inflation in the US in 13 years could extend to 2022 due to persistent shortages of labor and materials, especially if the delta coronavirus strain delays the full reopening of the economy.

That’s one of the big takeaways from the minutes of the last big Federal Reserve meeting in July.

At the two-day meeting, “most” members of the Fed’s strategy-making group said it would be appropriate to begin withdrawing support for the US economy before the end of the year. The central bank adopted a series of measures at the beginning of the crisis to keep interest rates close to zero to stimulate growth.

The economy is growing at a fast pace, but Fed VIPs also highlighted the new uncertainty posed by the delta and the possibility that it could exacerbate widespread shortages in the economy that are limiting growth. This shortage has also contributed to large price increases and highest inflation rate since 2008.

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“Many participants commented that the uncertainty was quite high, with the slowdown in vaccine progress and developments around the Delta variant posing downside risks to the economic outlook,” the minutes read.

Delta was mentioned six times in the Fed’s summary of the July meeting versus not a single mention in the June minutes.

Senior Fed officials acknowledged in June that inflation could remain higher for longer than they had previously assumed due to widespread shortages.

Read: Delta cuts the economy and threatens more inflation

While this shortage is expected to subside once the economy returns to normal, Fed officials were more pessimistic in July than they had been just a month earlier as to when the bottlenecks would disappear.

“Participants generally saw that supply disruptions and labor shortages are likely to persist into the second half of the year,” the minutes read.

Delta could weigh more on the job market. Up to 9 million Americans who would have been working had there not been a pandemic are still absent from the workforce. A large part of them are too afraid of the virus to return.

The lack of manpower has forced many companies to raise wages to try to attract workers. When that fails, some have had to cut production or even reduce the amount of time they are open. Now, it might even be the case that some companies delay hiring until they see the rise in the delta unfold.

“The spread of the Delta variant may temporarily delay the full reopening of the economy and restrict the hiring and supply of labor,” the Fed minutes said.

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The current labor and material shortages, Fed officials admitted, also “complicates the task of interpreting incoming data” to determine when and how quickly inflation will begin to decline.

The Fed for months had predicted inflation would return to pre-crisis levels of 2% or less by the end of this year before throwing in the towel.

Most Fed members still stick to that script, but now the Fed doesn’t expect that to happen until sometime in 2022.


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