Federal Reserve policymakers fanned out last week to spread the gospel of transitory inflation. Everyone is worried about the accelerating pace of price increases except the people who can do something about it.
Why? What do they know that the rest of us don’t? They know that Jerome Powell won’t be reappointed as Fed chairman if he raises interest rates just as President Joe Biden is trying to push trillions more in government spending through Congress. We know that, too, but we thought it didn’t matter.
It apparently does matter as Fed policymakers dig in and claim—without any evidence—that the sharp rise in inflation is temporary.
Fed Vice Chairman Richard Clarida acknowledged he “was surprised” at the jump in the consumer price index reported on Wednesday, which showed month-on-month inflation up 0.8% instead of the 0.2% forecast, and year-on-year inflation up 4.2%, compared with 2.6% in March.
But Clarida repeated the Fed’s mantra of still being a “long way” from its goals of maximum employment along with stable prices.
Bank of England chief economist Andy Haldane could afford to be less circumspect in expressing his worries about inflation in Britain, which faces the same economic rebound as consumers satisfy pent-up demand by spending the £150 billion in pandemic savings.
Haldane, who has announced his departure from the central bank, was the only member of the Monetary Policy Council—the British equivalent of the Federal Open Market Committee—who voted to cut the central bank’s bond-buying program at the meeting earlier this month.
“This is not a case of slamming on the brakes, but rather gently taking our foot off the accelerator,” he said last week. Inflation, he warned, would cause “collateral damage on our finances, squeezing the purchasing power of our pay and causing rises in the cost of borrowing.”
Andrew Bailey, the governor of the Bank of England, who isn’t planning to leave his post, was quick to contradict his chief economist, echoing the Fed in saying that the increase in inflation would be temporary and the central bank would not rush into premature action.
Some economists worry that what looks like an uptick in inflation from temporary factors like supply bottlenecks and labor shortages could become more permanent as employers hike wages to lure workers, and unleashed consumer demand heats up the economy, changing inflation expectations.
Fed Governor Lael Brainard acknowledged that persistent supply-chain issues could prompt a change in expectations. “I will be carefully monitoring measures of long-term inflations expectations to ensure they are well anchored at 2%,” she said last week.
The newest member of the board of governors, Chris Waller, the former chief economist at the St. Louis Fed, thinks inflation expectations remain well anchored. For him it is significant that the breakeven measures of inflation based on the differences between inflation-protected Treasuries and conventional show inflation at 2.5% over five years, and 2% over 10 years, implying expectations the inflationary pressures will recede after a temporary surge.
Cleveland Fed chief Loretta Mester chimed in to say that monetary policy needs to remain “very accommodative” to support a broad-based recovery as Fed policymakers look for further progress on the labor front.
Dallas Fed President Robert Kaplan, who has broken ranks in the past by suggesting it’s time to talk about tapering bond purchases, is demurring again on the inflation question. He sees a risk that expectations could shift.
“What you don't know is, depending on how long that goes on, whether that starts to get embedded in inflation expectations, and you worry that inflation expectations start to get to be more elevated, and then you are getting them elevated to a level that is not consistent with anchoring them at 2%,” he said during a University of Texas event.
The closely watched University of Michigan survey on consumers’ inflation expectations last week showed a jump to 4.6% from 3.4% for near-term inflation, while the five-year expectation hit 3.1%, the highest level in a decade, up from 2.7% in April.
Transitory? We’ll see.