–Sees First Funds Rate Hikes ‘More Than A Year Off’
–Doubts Tapering Will Have Much Economic or Financial Impact
–Price Stability ‘Could Be On The Line In Coming Months’
–Persistent Wage-Price Pressures Could ‘Unanchor’ Inflation Expectations
By Steven K. Beckner
(MaceNews) – Atlanta Federal Reserve Bank President Raphael Bostic sounded somewhat of an alarm about inflation Tuesday as he advocated beginning to phase out the “emergency” monetary policies the Fed has followed since the onset of the coronavirus epidemic a year and a half ago.
Bostic, a 2021 voting member of the Fed’s policymaking Federal Open Market Committee, said the first step should be to scale back the Fed’s $120 billion asset purchases, and he gave every indication he will vote at the FOMC’s Nov. 2-3 meeting to start tapering those purchases.
He doubted reducing bond buying will have much economic or financial market impact as he answered questions during a webinar hosted by the Peterson Institute for International Economics.
Bostic said he still favors a “lower for longer” approach to interest rates and said that, as far as he’s concerned, the first increases in the federal funds rate from near zero are still “more than a year off.” But he suggested his view could change if inflation persists at a high level.
Although Fed Chairman Jerome Powell and many of his colleagues have repeatedly called elevated inflation “transitory,” Bostic said that has become “a dirty word” at the Atlanta Fed. A better term for recent price pressures is “episodic.”
However, he warned, “episodic” inflation pressures growing out of Covid-related supply bottlenecks, shipping problems and resurgent demand, could turn into more persistent inflation and cause inflation expectations to become “unanchored.” So he said inflation must be watched very closely.
Bostic sounded ready to proceed with tapering on Nov. 3. After warning of upside risks to inflation and inflation expectations in prepared remarks, he said, “I believe the conditions I’ve described argue for a removal of the Committee’s emergency monetary policy stance, starting with the reduction of monthly asset purchases, as we discussed in last month’s meeting.”
The FOMC has been waiting for “substantial further progress” toward its maximum employment and average 2% inflation goals to taper bond buying. In its Sept. 22 statement the FOMC said, “If progress continues broadly as expected, the
Committee judges that a moderation in the pace of asset purchases may soon be
warranted.” Powell told reporters then that the Fed would likely conclude tapering by mid-2022.
Despite concern about a “taper tantrum” in financial markets, Bostic said he is “not expecting much impact” on financial markets, since they now have “sufficient liquidity” and also is “not expecting this taper to do much in adversely affecting the speed of recovery.’
Powell emphasized in his post-FOMC press conference that tapering would not necessarily mean the FOMC will start raising the federal funds rate from near zero next year. Only half of the 18 FOMC participants project a 2022 rate hike.
Asked about his own funds rate projection, Bostic responded by saying the economy “has continually surprised to the upside,” and that as a result he has “updated my dot plot submissions to reflect much greater growth, jobs and inflation and to pull forward when interest rate liftoff will be.”
However, he said the first rate hike is “still more than a year off in my forecast.”
But Bostic suggested his rate predilections could change if inflation continues to worsen and threaten to disrupt the economy.
“What we’re trying to do is walk that fine line,” he said. “The real question is how much longer this elevated inflation going to run and to what extent is it going to do harm to the economy.”
“Right now we’re not seeing signs that elevated inflation is doing the kind of harm to the economy that calls into question our policy stance relative to interest rates,” he went on. But he said he is talking to business leaders to find out “to what extent are current conditions disrupting business expectations and leading to decisions that could undermine growth…”
For the time being, Bostic said, “I still have in mind a lower for longer approach,” because he wants to maximize job creation.
However, he added, he is “concerned and nervous to make sure there aren’t developments that I didn’t expect” that might “undermine our ability” to achieve full employment.
Inflation has flared in recent months as strong demand, particularly for durable goods, fueled by massive monetary and fiscal stimulus, has interacted with supply shortages for a variety of parts and products. The Consumer Price Index rose a more moderate 0.3% in August, but was still up 5.3% from a year earlier. The core CPI rose 0.1% and 4.0% year-over-year. The Labor Department will release the September CPI report Wednesday.
Inflation expectations have also risen. Before Bostic spoke, the New York Fed released its September Survey of Consumer Expectations showing that “short- and medium-term inflation expectations rose to their highest levels since the inception of the survey in 2013.”
Bostic expressed trepidation about the inflation outlook.
“However we choose to analyze the data, I’ve seen enough to conclude that underlying inflation is indeed above the Committee’s 2% objective,” he said. “And upward price pressures are expanding beyond a handful of relative prices elevated by idiosyncratic forces.”
He also cited upward pressure on wages in the face of labor shortages.
“Certainly, it’s too early to proclaim we are witnessing a wage-price spiral like the one that led to the Great Inflation,” Bostic said. “But conditions merit watching, and my staff and I are doing just that.”
Bostic says he still believes “currently elevated inflation is episodic, driven by pandemic conditions such as disruptions in supply chains and labor markets.”
“A major caveat, though, is that the severe and pervasive supply chain issues will probably last longer than most of us initially expected,” he continued. He said price pressures have “broadened,” not narrowed and said inflation pressures are the worst since the “Great Inflation” of the 1970s.
Pointing to a variety of alternative inflation guages, Bostic observed, “all these underlying inflation measures are pointing to growing, broad-based inflation essentially at or above our target.”
Bostic said that “up to now, indicators do not suggest that long-run inflation expectations are dangerously untethered.” But he warned “the episodic pressures could grind on long enough to unanchor expectations. We will be watching carefully.”
Bostic added that the FOMC’s concept of “price stability could be on the line in coming months.”
While he couldn’t say how far inflation is likely to remain above 2%, Bostic said “upside risks are salient.”
He said “the real danger, is that the longer the supply bottlenecks and attendant price pressures last, the more likely they will shape the expectations of consumers and business people, shifting their views on pricing and wages in particular.”
Because “this is our first inflationary cycle under the FOMC’s new policy framework,” Bostic said it’s important for the Fed to communicate “how we gauge progress toward our inflation goals and what we view as the appropriate inflation signal on which consumers, business people and markets should focus.”
Contact this reporter: steve@macenews.com
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