Powell warns inflation into 2022, Yellen says BBB won?t worsen trend

BY SourceMedia | MUNICIPAL | 11/30/21 02:39 PM EST By Caitlin Devitt

Federal Reserve Chair Jerome Powell warned Tuesday that inflation may persist well into next year and that the central bank is likely to accelerate its tapering of its bond-buying program.

Powell, joined by Treasury Secretary Janet Yellen, spoke at a Senate Banking Committee hearing on the CARES Act and the economy. The officials told lawmakers that the economy continues to grow and that the Build Back Better bill would not add to inflationary pressures.

It's ?a good time to retire? the word transitory as it applies to inflation, which the Fed now expects to persist into mid-2022 before beginning to subside, Powell said. In originally saying inflation would be transitory, forecasters ?didn?t predict the supply-side problems and those are very unusual,? Powell said.

Powell also said the bank at its Dec. 14-15 meeting would consider accelerating the tapering of its asset-buying program ?by a few months? depending on the latest data on inflation, employment and the worrisome new Omicron variant of the virus that causes COVID-19.

?The economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months earlier.?

The Fed is currently on track to end by next June its $120 billion monthly purchases of Treasuries and mortgage-backed securities. The bank launched the program in 2020 to support the economy at the height of the COVID-19 turmoil.

Inflation remains a key concern for municipal bond buyers heading into 2022. Tapering the asset buying program would likely cause interest rates to rise, another concern for muni investors, though some say it could generate badly needed income after years of low rates.

Yellen emphasized the Biden Administration?s position that the $1.7 trillion Build Back Better bill, passed by the House on Nov. 19 and now headed to the Senate, would not increase inflationary pressures in part because it?s paid for.

The Congressional Budget Office has found that Build Back Better ?will not worsen the debt or deficit path and indeed by the end of the 10-year horizon, Build Back Better lowers deficits and yields very great benefits beyond the 10-year gap,? Yellen said. ?It?s a fiscally responsible plan that makes matters better rather than worse.?

As to the debt ceiling, Yellen repeated earlier comments that Congress needs to raise or suspend the debt ceiling by Dec. 15. That?s the date when Treasury will transfer $118 billion into the Highway Trust Fund, as outlined in the new infrastructure law. ?We think it?s important for Congress to recognize that we may not be able to [finance the government past that date] and therefore to raise the debt ceiling expeditiously.?

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.