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US economic output has rebounded higher than pre-pandemic levels; Americans are sitting on at least US$2.5 trillion in excess savings accumulated during the pandemic and consumer spending remains strong. Bond buys most directly affect demand whereas economies worldwide are struggling with labour and goods shortages.<\/p>\n
Indeed, the surge in demand as the US economy reopened has caused a spike in inflation with persistent supply bottlenecks set to keep price increases well above the Fed’s 2 per cent average inflation goal through the end of the year and into next year. That has raised fear of a 1970s-style “stagflation”, where economic growth grinds to a halt but inflation keeps rising.<\/p>\n
Fed policymakers on Tuesday said that is not their expectation.<\/p>\n
“The big unknown right now is how long it will take for these bottleneck effects to work their way through,” Mr Clarida said in a question and answer session, but the expectation is that they will recede. “My baseline case is not for stagflation over the medium horizon.”<\/p>\n
And though analysts have raised the possibility that rising inflation could force the central bank to raise interest rates from near zero before the labour market is fully healed, Mr Clarida and other policymakers played down that possibility.<\/p>\n
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“The risks to inflation are to the upside,” Mr Clarida acknowledged but said he still believes the upward impulse is “transitory”, with inflation expectations anchored and rising wages not feeding a worrisome upward price spiral.<\/p>\n
Mr Bostic for his part joked that at his bank anyone using the word “transitory” to describe inflation has to put US$1 in a swear jar, because the current episode of rising prices is proving to be far from brief.<\/p>\n
Still, he said, he does not expect high inflation to persist or cause lasting damage to the economy that “would really call into question our policy stance in terms of interest rates”.<\/p>\n
It will be more than a year before the central bank will need to raise rates from near zero levels, he said.<\/p>\n
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