Temporary factors will push measured inflation higher this spring but the distortions won’t last long, said Boston Federal Reserve President Eric Rosengren.
“My view is that this acceleration in the rate of price increases is likely to prove temporary,” Rosengren said Wednesday in a webinar with Boston College.
“Toilet paper and Clorox were in short supply at the outset of the pandemic, but manufacturers eventually increased supply, and those items are no longer scarce. Many of the factors raising prices this spring are also likely to be similarly short-lived,” Rosengren said.
Rosengren cautioned that it is too soon to know whether trend inflation will rise as the economy strongly recovers in 2022 but the most likely outcome is inflation trending close to the Fed’s 2% long-run target.
Economists are divided on the question of what the trend rate of inflation will be the 2022, with some economists seeing inflation above the Fed’s 2% target, even though the consensus is 2%.
“This would not be a situation where I would be at all alarmed if these forecasters have it about right,” he said.
Rosengren said he would be watching the data carefully and said inflation could be stronger than expected. He said he would be watching the employment cost index to see if wages move higher. That would be a warning sign that the price increases he expects to be temporary might be higher than anticipated.
Earlier on Wednesday, Chicago Fed President Charles Evans said he thought the chances of persistently higher inflation were remote.
The Fed is buying $120 billion of assets each month, and holding short term interest rates close to zero, in order to provide support for the economy.
Both Rosengren and Evans said they did not want to start discussing tapering the asset purchases, which would be the first step in the central bank taking its foot off the gas pedal in support for the economy.
Fed Chairman Jerome Powell has said the Fed is “not thinking about thinking about” reducing the pace of purchases and said the central bank would let investors know when it was starting to contemplate having those discussions.
Asked about tapering on Wednesday, Rosengren said: “I don’t think we’re at the point of being particularly specific right now.”
“We need to have a substantial improvement for us to begin tapering,” he said. “It is quite possible that we’ll see those conditions as we get to the latter half of the year. But right now, what we have is one really strong employment report, one quarterly GDP report. And so I think it’s premature.”
And earlier on Wednesday Evans told reporters, according to the Wall Street Journal that “I personally think the achievement of sustainable inflation averaging 2% is a lot harder than people think and so I’m not in any hurry to have that discussion.”
But Dallas Fed President Robert Kaplan, in an interview with MarketWatch, has called for a discussion about slowing down the Fed’s asset purchases. He said his contacts think inflation bottlenecks might last longer than previously thought.
Rosengren said the Fed is going to place emphasis on realized data rather than forecasts before taking policy actions.
“This implies that current policy will remain accommodative until the labor market can consistently help deliver on the Fed’s 2% inflation goal,” he said.
The S&P 500 index
rebounded on Wednesday rising after closing down 0.7% in the prior day’s session.