Fed’s Rosengren says higher inflation will be as temporary as last year’s toilet-paper shortage

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Boston Federal Reserve President Eric Rosengren in an interview with MarketWatch on Wednesday dismissed talk of scaling back asset purchases as premature, and said temporary factors pushing up inflation this spring won’t last.

“My view is that this acceleration in the rate of price increases is likely to prove temporary,” Rosengren said Wednesday.

“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%.

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.”

“There are some risks to delaying tightening policies, but there’s very significant benefits,” Rosengren said. “So I think for now, the benefits far outweigh the costs.”

Those include encouraging people to come back to work and helping “Latinx or Black Americans who have disproportionately faced unemployment during the pandemic,” he said.

Earlier 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.

Read: Kaplan says inflation surge may not be temporary

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.

Late Wednesday, Fed Vice Chairman Richard Clarida, one of the officials inside Powell’s inner-circle, also said he didn’t think it was time to start talking about tapering.

And Cleveland Fed President Loretta Mester said she wanted to see more improvement in the labor market before she would consider the conditions on the forward guidance on asset purchases as being met.

Mester noted that even after the Fed decides the conditions to scale back purchases has been met, that the Fed will still be buying assets and Fed policy will remain highly accomodative.

The S&P 500 index
SPX,
+0.07%
was up fractionally on Wednesday while the Dow Jones Industrial Average
DJIA,
+0.29%
rose 97 points to finish at 34,230.



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