Federal Reserve policymakers have gained an important ally in their effort to convince people that the current rampant inflation is transitory—the mainstream media is now mostly on board with this view.
Financial reporters have been finding sophisticated analysts to back up the Fed’s view that price pressures are temporary supply-chain issues and not structural. However, market indicators of moderate inflation five and 10 years out are open to interpretation. That is the beauty of the market—millions of investors weigh in with their bets, but few of them talk about it.
An alternative interpretation is that rampant, persistent inflation will force the Fed and other central banks to tighten monetary policy, including raising interest rates. And yet another interpretation is that a resurgent pandemic will dampen growth and cool down the economy, perhaps to the point of a recession. Meanwhile, monetarists express alarm about ballooning money supply and the risk that carries for inflation.
A survey of experts at the University of Chicago’s business school last month found 33% agreed that current monetary and fiscal policy risks prolonged higher inflation, when weighted for the confidence each had in their forecast, while 30% disagreed, and 36% were uncertain.
Opinion, it seems, is divided.
Former Treasury secretary and Harvard economist Larry Summers is a virtual Cassandra on the subject. He attributes the rally in government bonds, pushing down yields, to technical factors and adds that markets in any case have a lousy record predicting inflation.
Steven Rattner, another former Democratic aide, has stepped in as a wingman for Summers on this issue. In an opinion piece last week for the New York Times, Rattner demurred on bond market breakeven rates of 2.4% over the next 10 years. “I’m not so sure,” he said, warning that high inflation, even if short of the double digits four decades ago, could force the Fed to hike interest rates sooner than anticipated.
Like every other issue in the U.S. right now, inflation has become a political debate. With President Joseph Biden asserting—against historical evidence—that trillions of dollars in additional government spending will tame inflation, Democratic policymakers and Democratic-leaning media (is that redundant?) have to join the chorus insisting inflation is temporary.
Fed Chairman Jerome Powell, who is waiting to see if Biden will reappoint him, has cast his lot with the Democrats, even though he has ostensibly been affiliated with the Republican Party. Even so, mindful that history will also have a verdict, Powell is hedging his support for indefinite monetary stimulus.
The Federal Open Market Committee, after months of insisting there needs to be a vaguely defined “substantial further progress” to its objective of maximum employment (oh, and price stability), finally acknowledged last week that progress had been made. The committee, according to the policy statement, “will continue to assess this progress in coming meetings.”
Investors saw this as a clear hint that the long-awaited tapering of bond purchases was now on the agenda. At his press conference after the FOMC meeting, Powell repeated the statement's guidance, adding only that “any change in the pace of our asset purchases will depend on incoming data.”
Economists continue to expect guidance on a timetable after the September or November meetings of the FOMC.
However, St. Louis Fed chief James Bullard, something of an outlier on the FOMC, said on Friday that he wants to start reducing bond purchases already this fall, and finish the tapering process by March.
“We are tilted too much to the dovish side,” Bullard said in remarks to reporters after a webcast speech, warning the Fed is not in a good position to react if inflation persists at a high rate.
Bullard, who rotates into a voting position on the FOMC next year, says even if inflation slows down as expected, he doesn’t see it moderating completely in 2022 and is forecasting a rate of 2.5% to 3%.
In the meantime, he says the Fed needs to be ready to act. If inflation does ease on its own, he says, “we have a beautiful response—just stay at near zero policy and push off the date of liftoff.”