– Federal Reserve Chairman Jerome Powell surely expected some breathing room after taking the first step this month to cut back on the Fed’s emergency aid to the economy.

Barely a week later, however, the government reported that consumer prices had risen over the previous 12 months, to their highest in three decades. The spike in inflation squeezed consumers, posed a threat to the Biden administration, and stepped up pressure on Powell to act.

Some economists – and some Fed officials – want the Fed to act faster to curb its ultra-low rate policies. Other policymakers favor a more patient approach to interest rates. The result is a split within the Fed that Powell will likely have to sort out, with potentially significant consequences for the economy.

It all comes just as President Joe Biden is set to announce whether he will offer Powell a second four-year term as Fed chairman or instead appoint Lael Brainard, the main alternative, which is member of the Board of Governors of the Fed. Powell’s term as president expires in February.

Whether the Fed needs to act faster to withdraw the huge aid it has injected into the economy to fight the pandemic recession highlights the extraordinarily delicate task that awaits the Fed as it seeks to contain inflation without slowing down an economy that still lacks 4 million jobs. pre-pandemic levels.

The main source of disagreement at the next central bank meeting in December is likely to be whether it should speed up the reduction, or tapering, of its monthly bond purchases. The Fed bought $ 120 billion a month in treasury and mortgage bonds from last summer until Powell announced on November 3 that the Fed would cut those purchases, which were aimed at lowering long-term rates. and encourage more borrowing and spending.

Powell said purchases would be reduced by $ 15 billion per month in November and December, ending them completely by June. But the Fed has not made a commitment to maintain this pace; it offered the possibility of accelerating the retreat. This would give the Fed an opportunity to raise its short-term interest rate as early as the first half of 2022. A rate hike would in turn lead to higher consumer borrowing costs for things like mortgages and loans. credit card.

Jason Furman, a Harvard economist and former adviser to President Barack Obama, noted in a conversation with reporters this week that the country’s unemployment rate has fallen faster than expected to a relatively low 4.6%. , while consumer inflation hit its highest level in 31 years at 6.2%. Higher inflation lowers the effective cost of lending, making the Fed’s policy even more supportive of growth – and potentially inflation – than it was at the start of the pandemic.

All of these factors, Furman suggested, justify a faster tightening of the Fed’s low interest rate policies. He said the Fed should complete its cut by March, plan to hike rates in the first half of next year and potentially do so three times in 2022, unless inflation drops quickly.

“The problems in our economy,” Furman said, “are not enough gunfire, not enough port throughput. Buying assets and keeping interest rates low doesn’t solve these problems.

Some Fed policymakers are pushing in a similar direction. Among them, James Bullard, president of the Federal Reserve Bank of Saint-Louis.

“It makes sense to try to be a little more hawkish here and try to manage the risk of inflation,” Bullard said in an interview this week with Bloomberg Television. (“Hawkish” refers to Fed policymakers who prioritize raising rates to fight inflation, while “doves” generally prefer to keep rates lower to boost growth and hiring. )

Many economists have advanced their timelines for a first Fed rate hike. Goldman Sachs is now forecasting two rate hikes next year, nearly a year earlier than their previous projections.

Some Fed officials, however, are keen to take a more patient approach, allowing the cut to continue until June, and then taking the time to assess whether further rate hikes are needed.

Mary Daly, who heads the San Francisco Fed, said this week that she understands the hardships caused by high inflation, especially for people living paycheck to paycheck. In remarks to a business audience, she said she saw a woman at Walgreen recently removing things from her shopping cart when checking out because they had become too expensive.

Still, Daly said she believes the Fed should continue its current rate of reduction until June, and then, assuming the pandemic gradually loosens its grip on the economy, wait to get a clearer picture of the demise. inflation.

“If the current figures of high inflation and worker shortages prove to be COVID-related and transient, higher interest rates would dampen growth, slow the labor market recovery and needlessly put millions of workers on the line. away, ”Daly warned.

Furman is advocating a more hawkish approach due to the risk that inflation will be pushed higher in the coming months by factors unrelated to the pandemic, such as higher rents and regular salary increases. Companies, in turn, can raise prices to offset the cost of higher compensation.

More dovish economists counter that the main cause of inflation is not a general overheating of the economy, which is normally why the Fed is tightening credit. This time, they say, the main driver has been a shift among consumers to spend heavily on goods like furniture, appliances, and cars, as the pandemic has kept people at home longer and limited expenses for services such as flying, dining out, and watching movies and concerts.

Spending on goods has jumped 15% since the pandemic, note economists at Wells Fargo. After the last recession, spending on goods did not increase as much as eight years after the onset of the recession. This high demand clogs ports and overwhelms freight trains and the trucks that deliver them.

Consumers are likely to reallocate some of that spending on services as the pandemic wears off, which could slow inflation, said Michael Pugliese, economist at Wells Fargo.

Powell hinted he was pondering this question at a press conference after the recent Fed meeting, when he said consumers would likely reallocate some spending to services soon.

The debate intensifies as Biden moves closer to the decision to re-elect Powell as Fed chairman. The president told reporters on Tuesday he would announce his decision as early as this week.

“With the grace of God and the goodwill of the neighbors, you are going to hear this in about four days,” he said.