— “The argument for patience in the face of these inflation pressures has diminished.”
By Steven K. Beckner(MaceNews) –
— “The argument for patience in the face of these inflation pressures has diminished.”
(MaceNews) – Kansas City Federal Reserve Bank President Esther George appeared to challenge Fed Chairman Jerome Powell’s recently enunciated premise that the central bank can afford to be “patient” about addressing rising inflation pressures in a speech Friday.
George said she and her colleagues will face “complicated” choices as they strive toward maximum employment while at the same time inflation is being fueled by a Covid-related mix of resurgent demand and supply constraints, aggravated by expansionary monetary and fiscal policy.
George, who will be a voting member of the Fed’s policy making Federal Open Market Committee next year when the FOMC will be considering whether to raise short-term interest rates from near zero, welcomed the FOMC’s decision two days earlier to start reducing asset purchases.
But she said monetary policy will remain highly stimulative even as “tapering” proceeds and said federal deficit spending is also fueling demand pressures on wages and prices.
While announcing Wednesday it will start tapering its $120 billion per month bond buying by $15 billion per month “later this month,” the FOMC left the federal funds rate in a zero to 25 basis point target range, and Powell suggested there should be no rush to raise it after tapering concludes around mid-2022.
Powell said, “the time for lifting rates and beginning to remove accommodation will depend on the path of the economy,” but said, “we think we can be patient. If a response is called for, we will not hesitate.”
Elaborating on his “patient” approach, Powell said, “It’s appropriate for us to see what the labor market and what the economy looked like when they heal further.” He expressed the hope that as the economy “heals,’ “it will evolve in a way that will mean low inflation.”
George seemed to feel a greater sense of urgency in a virtual conference co-hosted by the Kansas City and Dallas Federal Reserve Banks.
“Disruptions that initially appeared to be temporary bottlenecks driving up prices now look as if they may be more long-lasting, with widespread reports suggesting that supply chains will not recover until well into 2022,” she observed. “Additionally, while in the spring the increase in prices was being driven by select categories of goods and services, more recently the increase in prices has become generalized, and is apparent across a broad swath of the economy ….”
“As supply chains heal and demand eases, there is reason to expect inflation will eventually moderate, but it is also clear that the risk of a prolonged period of elevated inflation has increased,” George went on, adding, “The argument for patience in the face of these inflation pressures has diminished.”
Not only has the price of oil doubled, “we see the interaction of demand and supply dynamics creating price pressures in the broader economy,” she said. “This has been particularly true for goods, as the pandemic led consumers to rotate consumption from in-person services towards purchases for their homes. Strong demand has led to a remarkable increase in prices for durable goods .…”
George further noted that “wage growth has also accelerated, particularly for lower-income hourly workers.” She said, “the tightness in the labor market could prove temporary as a sizable number of people, about 5 million, remain out of work relative to before the pandemic …,” but said ‘a full recovery of the labor market appears unlikely until childcare normalizes.”
Her comments coincided with the Labor Department’s October employment report, which showed average hourly earnings rising 4.9% from a year earlier, as non-farm payrolls grew by 531,000 and the unemployment rate fell to 4.6%. The price index for personal expenditures (PCE), the Fed’s preferred inflation gauge, rose 4.4% in September, while the consumer price index jumped 5.4%.
George did not call outright for an early “liftoff” from the zero lower bound of the funds rate, although she remarked that “as the adjustment of asset purchases gets under way, the focus of attention will naturally shift to the path of the policy rate.
But based on these and previous expressions of concern about both inflation and financial stability risks, it seems likely George was among the nine FOMC participants who, in late September, projected at least one rate hike next year.
In past episodes of soaring energy prices, she recalled that the guiding Fed philosophy was to “look through” price pressures deemed to be temporary, and to not respond to “relative” price changes.
But in the current climate of faster gains in not just energy but other prices, as well as wages, “the time frame for resolving bottlenecks and the scope of categories reflecting price pressures make the answer to this question less than straightforward,” George said.
She suggested the FOMC will face extraordinarily complicated policy choices in 2022. “In most circumstances, the Federal Reserve’s dual mandate objectives for maximum employment and stable prices are in alignment, so that the Fed’s policy actions support both objectives simultaneously,” she said.
“There are however times when the objectives can appear to be in conflict,” she continued. “And now might be one of those times with inflation running well ahead of its longer-run average and labor markets appearing to have further room to recover.”
“While the current economic alignment certainly adds complexity for policymakers, ending asset purchases is an important first step along the path to policy normalization as we balance our long-run objectives and seek to promote sustainable growth and financial stability,” she added.
However, George suggested long-awaited tapering may not do much to alleviate inflation, since there are currently no plans to reduce the size of the Fed’s balance sheet.
“It is important to note that while the pace of asset purchases is slowing, the cumulative effect of these purchases is arguably the more substantive force acting on the economy,” she said, noting that since March of last year, the Fed has purchased more than $4 trillion of securities, pushing our total asset holdings to $8.5 trillion dollars.
“These asset holdings are depressing longer-term interest rates most relevant for households and businesses and thereby are providing a significant amount of accommodation,” she continued. “And, importantly, this accommodation will persist even when tapering is complete.”
“Taken together, monetary policy remains highly accommodative in an economy where inflation is elevated and labor markets have yet to fully recover,” George went on. “With both supply and demand factors clearly at play, the choices for policymakers will be complicated as uncertainty remains high for how temporary or persistent these frictions will prove to be.”
Aside from monetary ease, fiscal policy is adding to inflation pressures, George indicated. “Fiscal transfers in the United States have supported incomes and spending.”