The Decline In Inflation Could Take Longer Than Expected
All financial institutions conduct research on inflation figures and forecasts. Undoubtedly, some of them stand out with their logical and result-oriented explanations. One of them is the Federal Reserve, which repeatedly points out that the expected decline in inflation might take some time to materialize.
FED Officials’ Statements Are Noteworthy
Federal Reserve officials spoke at the Monetary Policy Symposium organized by the University of Chicago’s Booth School of Management. Cleveland Federal Reserve Bank President Loretta Mester said inflation concerns have increased and interest rates should continue to rise, while Federal Reserve Board member Philip Jefferson stressed the Fed’s reliability. Another Fed president, James Bullard, said inflation expectations will approach pre-crisis levels by 2021.
What Are The Themes Of Inflation Expectations?
“Interest rates should continue to rise to reach the 2% target.”
Federal Reserve Bank of Cleveland President Loretta Mester said the Fed should continue to raise interest rates to bring inflation back to the 2% target. Mester, who believes inflation risks have increased, said that in most cases the economy will move from deflation to recession.
“Right now, the labor market is strong, but the costs of below-target policy or very rapid easing outweigh the costs of above-target policy,” Mester said at the annual U.S. Monetary Policy Symposium organized by the University of Chicago Booth School of Business.
Mester told CNBC today that she does not expect a significant slowdown in the economy. The president of the Federal Reserve Bank of Cleveland stressed that the Fed can achieve its goal without harming the labor market, which is quite robust.
Jefferson Supports Fed’s Legitimacy
“The inflationary pressures currently weighing on the U.S. economy are a complex combination of short- and long-term causes that are not easily explained,” said Fed Board Member Philip Jefferson.
Emphasizing that the imbalance between labor supply and demand continues, Jefferson said the combination of labor costs and the significant share of the service sector means that high inflation can only decline gradually.
Jefferson said it is “reasonable” for policymakers to assume that lowering inflation will undoubtedly be costly.
“The Fed’s credibility is greater today than it was in the 1960s and 1970s,” Jefferson said.
“The Fed’s credibility is greater today than it was in the 1960s and 1970s,” Jefferson said, adding that the current situation may be different and that the Fed has more credibility than it did in previous years of high inflation.
Jefferson pointed out that at least some of the current inflation is due to reasons related to the recent pandemic and that the central bank has already taken swift and decisive steps to counter it.
Jefferson did not comment on the size of the rate hike or how long the Fed should keep rates at current levels.
Inflation Forecast Shows Binding Between 2023 And 2021
James Bullard, president of the Federal Reserve Bank of St. Louis and one of the most cautious Fed officials, spoke about deflation. In his speech, Bullard said he believed the Fed’s adherence to the 2% inflation target increased the likelihood of avoiding a recession while trying to lower inflation.
Bullard also answered the question of whether the Fed can bring inflation back to 2% relatively easily and quickly, or whether a severe recession will occur, as in the case of former Fed Chairman Paul Volcker. The president of the Federal Reserve Bank of St. Louis pointed out that Volcker’s disinflation was costly and that few initially believed the Fed was serious about fighting inflation. Bullard said the magnitude of inflation shocks before 2021 is close to inflation expectations.
Fed Expected To Take A Step Back In Fighting Inflation
The Fed official pointed out that the current situation in the U.S. is more in line with Volcker’s scenario of “credible disinflation” than Volcker’s scenario of “incredible disinflation.” “Given that today’s central banks are more credible than their counterparts in the 1970s, it looks like the Fed can bring inflation back in an orderly fashion and achieve a fairly soft landing,” Bullard said.