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Fed declares high inflation, geopolitics cloud outlook

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

“Inflationary pressures have remained strong since the last report as businesses continue to rapidly pass on rising input costs to customers,” the U.S. central bank said in its Beige Book survey released Wednesday. “The outlook for future growth has been 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 pivoting hawkishly as it battles the highest inflation in four decades, with officials raising rates and preparing to trim the central bank’s nearly $9 trillion balance sheet . Policymakers said they would act “quickly” to bring rates down to a “neutral” level that does not stimulate or slow the economy. Fed officials are debating whether they will need to raise them above neutral – estimated at around 2.4% – and by how much.

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

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

The rising cost of supplies is pushing some companies to raise prices, according to the Fed report. For example, many New York District businesses said input costs were rising for a “wide range of supplies” and expected to rise further. “A large and growing share of businesses plan to raise their selling prices in the coming months,” the Fed said.

Some companies said a shortage of available workers made it difficult for them to recruit and retain staff, even after raising wages. In the District of Cleveland, some employers said they expected another wage increase this year, but some companies said past wage increases ‘have not resulted in improved hiring rates. or retention, and that they could not afford to increase wages any further”. Labor retention issues were cited by several of the Fed’s regional banks.

Businesses in the Minneapolis District reported that “rapid wage inflation” was increasing turnover in low-wage positions, and some contacts said they were considering automation to address “increasing wage pressure and lack of of workers”.

Some employers have made new efforts to bring workers back to the office by holding seminars and introducing new benefits. A large company in the St. Louis district introduced a cafe, arcade area, and more co-working spaces to encourage more people to come to the office.

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