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The Fed: Fed officials say they aren’t oblivious to the risk of surging inflation

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Two Federal Reserve officials said Wednesday said they were on alert and ready to be “nimble” about the possibility of higher inflation and didn’t have their heads in the sand as some critics have charged.

Atlanta Fed President Raphael Bostic said he stays open to “every scenario,” as it relates the outlook for the economy in the recovery phase from the COVID pandemic.

“I am paying attention. And because this is such an unprecedented times, I am going to be try to be as prepared as I can for whatever happens coming down the road,” he said, in an interview on Bloomberg Television.

Bostic’s comments are in direct response to former Treasury Secretary Larry Summers, who on Tuesday said the Fed seemed to be purposely ignoring the risk of overheating and that this stubbornness could ultimately damage the economy.

Officials only had “to walk outside” to see a booming labor market, Summers said.

Bostic said he expected a lot of volatility in the economic data through the summertime and things may only become clearer when schools reopen in the fall.

Strong annual gains in price indexes in the past two months have propelled inflation from business sections to front-page news. What is often missed is that the Fed welcomes higher inflation, at least, to a point.

“What monetary policymakers are counting on” is that some of the price gains seen during the reopening are “persistent,” said St. Louis Fed President James Bullard, in comments to reporters after a talk to the Official Monetary and Financial Institutions Forum, a London-based think tank.

Hopefully, the price gains will push up consumer and business inflation expectations and help anchor inflation at the 2% target, which the Fed hasn’t been able to hit consistently since 2012.

For this year and next, inflation is likely to be above 2%, and then the Fed can converge it back to the target, Bullard said.

“That’s the plan we have sketched out — you never know if it is going to work,” he said.

“This is a very volatile era and lot of things can happen, so we will see if that holds going forward,” Bullard said.

Both Bostic and Bullard said companies seem to the power to pass their higher costs to consumers. This ability was absent in the wake of the financial crisis of 2008-09, as any company that tried to raise prices would be undercut by global competition fueled by technology.

Bostic said it still isn’t clear yet whether this “pricing power” would last after the surge in demand from the end of the pandemic wanes.

Both Fed officials agreed it wasn’t yet time for the Fed to begin to talk about tapering its $120 billion in monthly asset purchases that been viewed as a key support for financial markets at the height of the pandemic-led selling back in March of 2020.

“We are not there right now. We are still 8 million jobs short,” Bostic said.

Bullard said he wanted to wait to talk about reducing accommodation until it was clearer the pandemic was over.

“You don’t want to start down a path of changing policy and then have to go back into emergency mode because the pandemic has gone in some direction you didn’t anticipate,” Bullard said.

He said the decision to begin to talk about tapering or removing easy-money policies would come from Fed Chairman Jerome Powell. He said he thought the Fed could engineer the taper so that it was a “nonevent” for markets.

Meanwhile, stocks were down sharply on Wednesday with the Dow Jones Industrial Average
DJIA,
-0.68%

down 274 points. The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.682%

moved up to the high end of its recent range.

Market participants were looking to glean further clues about the central bank’s monetary-policy strategy from minutes from the most recent meeting in April.

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