–Economy in Transition; Must ‘Look Through’ Data For ‘True Signal’ On Inflation
–No Clear Signal On Inflation Until ‘At Least September’
–Clarida: Employment 1 ½ Years From Full Employment; Inflation Transitory
By Steven K. Beckner
(MaceNews) – Atlanta Federal Reserve Bank President Raphael Bostic Wednesday again downplayed inflation risks while emphasizing the need to return the economy to full employment.
Bostic, a voting member of the Fed’s policymaking Federal Open Market Committee, said monetary policy will not be as “preemptive” as in the past in response to tightening labor markets or in response to “transitory” upswings in inflation.
Instead, the FOMC should allow its revised long-run strategy of letting inflation overshoot to achieve average 2% inflation to “play out,” he told a Council on Foreign Relations webinar.
Only if inflation were to ratchet up from 2.3%, would he be concerned.
He said it will be hard to get a clear picture of inflation trends until “at least September.”
Bostic’s comments were consistent with earlier ones from Federal Reserve Vice Chairman Richard Clarida. He too indicated no shift toward a firmer monetary policy on the horizon.
On the heels of a worse-than-expected April consumer price report, Bostic showed little concern.
“We’re in really turbulent time,” he said. “This is a time when I expect there to be a fair amount of volatility in inflation.”
Echoing other Fed officials who have cited “base effects” in explaining the recent upsurge in prices, Bostic noted, “Last April, this economy was in a very different place. If you think about this on a year over year basis, it shouldn’t be a surprise that the number looks fairly large.”
What’s more, inflation is being driven higher by such things as the tripling of lumber prices and shortages of computer ships, he said.
“The real question you have to ask yourself is which of these shifts and pressures are likely to remain permanent versus those that are likely to remain transitory,” Bostic said.
“To the extent we think the pressures are going to be transitory that doesn’t say to me that that any kind of policy response is justified, actually, because it really doesn’t affect anything fundamentally different from where we were before,” he continued.
However, Bostic observed that “a lot has happened last year” in terms of how businesses, households and workers are “thinking about their relationship to the marketplace and the kind of prices they can charge, as well as the demands of workers.”
“There is a lot of shaking out that’s still to be done,” he said, adding that the Atlanta Fed has been trying to determine what firms and workers expect to be able to charge for their products and labor.
Bostic said “we are worrying about this” rise in inflation, adding, “it’s not as if inflation going to evolve in ways that are troublesome and wer’e not going to notice it.”
However, he said, “right now it’s too soon to say we’re definitely we’re in that space.”
When asked to quantify how long the “base effect” on inflation will last and how long it will take to get back to more a normal inflation environment,” Bostic replied he is “expecting a lot of volatility at least through September, and then we’ll have to see what’s happening with these supply chain disruptions and the commodity prices and those sorts of issues.”
“So for the next you know 4 to 5 months I think … there’s going to be a lot of noise that surrounds the true signal.”
Bostic said he is “hopeful” surveys “will really give us a sense of whether there’s a fundamental rethink happening among business leaders about how they think about pricing and how they think about wages and what they see as their ability to pass through input costs to the final product market.”
“If we see those changes and they seem to be sustaining, that may be other information, but I don’t think we’re going to get a clear, clear signal on this to say for sure that there are other than the transitory things driving this,” he went on. “So through the summer I think it’s going to be hard.”
Bostic said most business people he’s talked to “don’t see permanent shifts” in price behavior, but he conceded, “we’re still very much in a transitional phase” where both prices and wages are “in flux.”
“In this transitional period, we’re going to see a lot of volatility,” he said. “Our job is to …. look through it to see what the true signal is.”
Since last September, the FOMC has declared it “will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%.”
Bostic said communication has been important in convincing people 2% is not a “ceiling” for the FOMC and that it will be comfortable with inflation exceeding 2% “for some time.”
“Now the burden becomes letting it play out, and not at the first time that inflation is above 2% taking dramatic action, because that might signal that we’re acting like it’s a ceiling,” he said.
As for how long he would be willing for inflation to overshoot 2%, Bostic said, “it’s very hard to say that for sure,” but said, “the trajectory of inflation once we get above 2% is going to be very important to me.”
“So if we’re at 2.3 and it stays at 2.3 relatively stably for a period of time, that’s not going to be a source of concern,” he continued. “But if we go from 2.3 to 2.5 to 2.8 to 3.0 over several quarters, to me that sends a different signal.”
“So that’s the sort of thing I’ll be looking for as we go through the next several years,” he added.
The comments followed a Labor Department report that its consumer price index was up 4.2% overall from a year ago (3% core) in April – faster than expected.
Bostic gave no clear indication when the Fed might scale back asset purchases or raise interest rates, but emphasized, “We are not going to be so preemptive” on the old theory that “if employment is rising inflation is sure to follow.”
Bostic said he is “not seeing … excessive risks in financial markets” and said he is more focused on “our mandate of stable prices and maximum employment.”
Earlier Wednesday, Clarida, one of the top three Fed policymakers, was upbeat about the economy, but far less optimistic about the employment outlook.
“After looking at the details of Friday’s disappointing employment report, the near-term outlook for the labor market appears to be more uncertain than the outlook for economic activity,” he said in remarks prepared for delivery to the National Association for Business Economics,
“Employment remains 8.2 million below its pre-pandemic peak, and the true unemployment rate adjusted for participation is closer to 8.9 percent than to 6.1%,” Clarida continued. “At the recent pace of payroll gains – roughly 500,000 per month over the past three months – it would take until August 2022 to restore employment to its pre-pandemic level.”
Even a more rapidly improving job market wouldn’t necessarily necessitate making monetary policy less lax, according to Clarida. Under the new policy framework which the FOMC adopted late last year, “a low unemployment rate, in and of itself, will not be sufficient to trigger a tightening of monetary policy absent any evidence from other indicators that inflation is at risk of moving above mandate-consistent levels.”
For now, Clarida sees no inflation threat: “Over the next few months, 12-month measures of inflation are expected to move above our 2% longer-run goal, largely reflecting, I believe, transitory factors such as a run of year-over-year comparisons with depressed service-sector prices recorded last spring as well as the emergence of some supply bottlenecks that may limit how quickly production can rebound in certain sectors.”
“However, under my baseline outlook, these one-time increases in prices are likely to have only transitory effects on underlying inflation, and I expect inflation to return to – or perhaps run somewhat above – our 2% longer-run goal in 2022 and 2023,” he added.
Like other Fed officials, Clarida said the Fed would respond to evidence of more lasting inflation pressures. ““If we saw evidence that there was a risk of a persistent upward drift in inflation expectations we would not hesitate to use our tools to offset that.” But he clear that is not what the central bank expects.
Clarida concluded that “notwithstanding the recent flow of encouraging macroeconomic data, the economy remains a long way from our goals, and it is likely to take some time for substantial further progress to be achieved.“
“We are committed to using our full range of tools to support the economy for as long as it takes until the job is well and truly done,” he added.
Bostic and Clarida joined in a unanimous April 28 FOMC decision to keep the federal funds rate in a target range of zero to 25 basis points and to maintain $120 billion of bond buying per month until the FOMC judges there has been “substantial further progress” toward its “maximum employment” and 2% average inflation goals.
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Contact this reporter: steve@macenews.com.
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