Inflation nervousness arises in earnings conversations, scaring investors and dominating TV corporate talk shows. One place they don’t take over, it seems, is the Federal Reserve.
The US central bank is charged with promoting maximum employment and stable inflation, making it the first line of defense against rapid price hikes. Fed officials have been clear for months that they expect prices to rise this spring and summer as the economy reopens, but believe the jump will be temporary. Overall, they stick to this script.
In a flurry of speeches and appearances on Wednesday, central bank policymakers made it clear that they did not believe the emerging price pressures were going to be painful or last long. Some have suggested that they would even appreciate what a warmer economy might have to offer.
“You talk about the overheating economy, you kind of say, ‘My God, I like to produce as much as we can,'” said Charles Evans, chairman of the Federal Reserve Bank of Chicago, during a call with journalists. “Why would you want unemployment to be higher when it can be lower?” It depends on the additional cost. “
The Fed is targeting inflation of 2% on average over time, so it is currently fishing for a period of slightly higher price gains to offset years and years of very small gains. Price pressures are picking up a bit after very slow readings a year ago during the worst pandemic shutdowns, and economists believe supply bottlenecks could keep them high for a while so that producers are trying to prepare for a national reopening.
But officials have made it clear they don’t expect this situation to force them to quickly reverse the policies they put in place to support the economy – by buying $ 120 billion in covered bonds. by the government per month and keeping interest rates low.
“We are still far from our targets, and in our new framework, we want to see real progress, not just forecasts of progress,” Richard H. Clarida, vice president of the central bank, said on Wednesday afternoon on CNBC. “As we go through the year, we’ll get more data.”
Fed policymakers have repeatedly said they want to see “further substantial progress” before slowing bond purchases, as well as full employment and 2% inflation with evidence that it will stay above. this level for a while before raising interest rates.
They made a distinction between inflation which surges in 2021 due to the reopening of oddities and lasting price pressures that suggest they have met their targets.
“My opinion is that this acceleration in the rate of price increases is likely to prove temporary,” Eric Rosengren, chairman of the Federal Reserve Bank of Boston, said Wednesday. “Toilet paper and Clorox were scarce at the start of the pandemic, but manufacturers eventually increased the supply, and these items are no longer scarce.”
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Still, Rosengren advised vigilance, saying the Fed should be careful to ensure the economy hasn’t changed in a way that makes wages and prices more responsive to a tightening labor market.
Michelle Bowman, one of six Washington-based Fed governors, said it was not clear how long it would take supply bottlenecks to dissipate, creating a source of uncertainty on inflation – but that it seemed very likely that price gains would remain contained.
“At this point, the risk that inflation will consistently stay above our long-term 2% target still looks low,” she said, according to prepared remarks released Wednesday morning. “I am encouraged by the recent pace of economic recovery and remain optimistic that this strength will continue in the months to come.”
If prices take off, the Fed could pull back or raise its buying rates. Either of these would make borrowing more expensive, likely slowing the economy and weakening the stock market.
“Our basic point of view is that we don’t overheat,” Mr. Clarida said. “If there are unforeseen and persistent upward pressure on prices,” then “we would use our tools to bring them down.”
Historically, sharp changes in Fed policy have sometimes triggered recessions. This is why some economists are worried. If the Fed is forced to act to quell price pressures, there are real risks to the economy that could hurt the most vulnerable, who tend to lose jobs first in a downturn.
But Mr Clarida stressed that there were also risks of the economy turning out to be worse than expected, especially if the virus broke out in a vaccine-resistant variant. And several Fed officials, including Mary C. Daly in San Francisco, have made it clear they want avoid taking an overly defensive position.
If the Fed signals that it could raise rates sooner and market-based financial conditions tighten in response – often the case with central bank communications – it could make borrowing more expensive and slow down the market. economy. In this case, it may take longer for the labor market to reach its full potential.
“Why do we have bottlenecks?” Mrs. Daly asked on twitter Wednesday. “Newly vaccinated people are spending, so we have a ‘freedom-driven demand surge.’ Producers must catch up. So get through temporary spikes in inflation – the economy is in transition. “
Mr Evans said he wanted people worried about an overheating economy to explain precisely how much they thought inflation was about to rise – and how the economy was going to get to a place. where prices would remain warmer for a long time.
“I really wish that people who say they are concerned about inflation, that they kind of fill in the dots on exactly what kinds of numbers are you talking about,” Evans said.
He also said he was happy with the possibility of wages rising even though companies did not have the power to pass this on as inflation, forcing companies to shoulder higher costs and cut profits.
“If wages go up, if the labor share were to go up relative to the capital share, I mean, I’m a little agnostic about it,” Evans said. “We’ve seen the labor share go down over a long period of time, and if we didn’t get our nose out of the joint then, why would we do it when the labor share went up?”