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With inflation running hot, the Fed is expected to dole out some cold water

RACHEL MARTIN, HOST:

With inflation in the U.S. at its highest level in nearly four decades, the Federal Reserve is expected to take action today. Fed policymakers are likely to say that they're phasing out a big bond buying program faster than they planned to just six weeks ago. That would give the central bank more flexibility to raise interest rates earlier next year, if necessary, to keep prices from spiraling out of control. NPR's Scott Horsley has more.

SCOTT HORSLEY, BYLINE: Consumer prices have been climbing at the fastest pace in nearly four decades, and both the size and staying power of those price hikes have repeatedly caught the Federal Reserve by surprise. Fed Chairman Jerome Powell doesn't believe inflation's going to remain this high, but as he told lawmakers two weeks ago, there's no guarantee.

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JEROME POWELL: I'd say almost all forecasters do expect that inflation will be coming down meaningfully in the second half of next year. That's an expectation. The point is, we can't act as though we're sure of that. We're not at all sure of that.

HORSLEY: Since the beginning of the pandemic, the central bank has been buying more than $100 billion worth of bonds every month in an effort to prop up the economy. The Fed had already announced plans to wind down that program by next summer. Now Powell says it could be phased out sooner. That would give the Fed more room to use its traditional tool for fighting inflation - raising interest rates. But that's not a sure thing, either.

The central bank has said it won't raise interest rates until the U.S. has reached maximum employment, and there's still a big question about what that looks like. Nearly 2.5 million people who dropped out of the workforce during the pandemic have not yet returned. If they've left for good, the labor market is already very tight. But if more people start looking for work, as nearly 600,000 did last month, then the labor force could have a lot more room to grow. That's why Megan Greene, a senior fellow at Harvard's Kennedy School, says the Fed wants to keep its options open.

MEGAN GREENE: This was a different kind of recession that we've never really been through, and so the jury's still out on what's going to happen to the labor force.

HORSLEY: At the same time, the Fed is under pressure to show it's taking the inflation threat seriously. Average wages last month were up nearly 6% from a year ago, but Greene notes prices are climbing even faster.

GREENE: That feels terrible for everyone. Even though wages are increasing, inflation is outpacing wage growth, so that's eating into everybody's living standards.

HORSLEY: Investors generally seem to believe that inflation will cool off next year, but the average consumer is less confident. A new survey by the Federal Reserve Bank of New York shows consumers think inflation will still be hovering around 6% a year from now.

Scott Horsley, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.