A U.S. Federal Reserve divided over how to respond to fast-rising prices meets this week with the fresh complication of increased coronavirus infections and a global supply chain that, far from sorting out its problems, may be headed for more inflation-inducing trouble.
Fed officials are likely to affirm after their two-day meeting that a strong U.S. recovery and their planning for an eventual policy shift both remain underway. But the new risks, threatening the twin ills of slowed growth and higher prices, mean the rosy future seen in June seems less assured.
Even if the worst of the new outbreak is concentrated among less-vaccinated communities, economists see it potentially changing consumers' willingness to spend and travel, and say it will likely require the Fed to strike a balance between keeping faith in the recovery while taking explicit stock of what could go wrong.
"Again and again we’ve seen over the last 18 months that the No. 1 determinant of economic activity is the virus," said Karen Dynan, a Harvard University economics professor and former assistant U.S. Treasury Secretary. "I think that we will continue to make forward progress, but that progress will be slower than otherwise.”
The rise of infections could, if it continues, weigh on the recovery, and would do so at a particularly tenuous moment. Rising inflation had been the immediate focus of Federal Reserve officials in recent weeks, cleaving the central bank between those worried prices may be increasing too fast and those arguing that the economy needed much more time to grow and regain lost jobs before any change in monetary policy.
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