Inflation jitters are popping up in earnings call chatter, spooking investors and dominating business television talk shows. One place they aren’t taking over, it appears, is the Federal Reserve.
America’s central bank is responsible for fostering maximum employment and stable inflation — making it the first line of defense against fast price gains. Fed officials have been clear for months that they expect prices to pop this spring and summer as the economy reopens but that they think the jump will prove temporary. By and large, they are sticking to that script.
During a volley of speeches and appearances on Wednesday, central bank policymakers made clear that they do not think incipient price pressures are going to prove painful or last long. Some suggested that they would even welcome what a hotter economy might have to offer.
“You talk about the economy overheating, you kind of go: ‘Gosh, I kind of like producing as much as we can,’” Charles Evans, president of the Federal Reserve Bank of Chicago, said during a call with reporters. “Why would you like unemployment to be higher when it can be lower? It depends on what the added cost is.”
aims for inflation at 2 percent on average over time, so it is currently angling for a period of slightly higher price gains to offset years and years of very weak gains. Price pressures are picking up a bit from very slow readings a year ago during the worst of the pandemic shutdowns, and economists think supply bottlenecks could keep them elevated for a time as producers try to ramp up for a national reopening.
But officials have been clear they do not expect that situation to force them to rapidly dial back the policies they have in place to bolster the economy — buying $120 billion in government-backed bonds per month and keeping interest rates at rock bottom.
“We’re still a long way away from our goals, and in our new framework we want to see actual progress, not just forecast progress,” Richard H. Clarida, the central bank’s vice chair, said on CNBC on Wednesday afternoon. “As we move through the year, we’ll get more data.”
The Fed’s policymakers have repeatedly said they want to see “substantial further progress” before slowing bond purchases, and full employment and 2 percent inflation with evidence that it will stay above that level for some time before lifting interest rates.
They’ve drawn a distinction between inflation that jumps in 2021 because of reopening quirks and sustainable price pressures that suggest they’ve achieved their goals.
prepared remarks released Wednesday morning. “I am encouraged by the recent pace of the economic recovery, and I remain optimistic that this strength will continue in the coming months.”
If prices take off, the Fed could dial back its buying or lift rates. Either move would make borrowing more expensive, likely slowing the economy and denting the stock market.
“Our baseline view is that we don’t overheat,” Mr. Clarida said. “If there are unforeseen, persistent upward pressures on prices,” then “we would use our tools to bring it down.”
Historically, abrupt Fed policy changes have at times set off recessions. That’s why some economists are worried. If the Fed is forced to act to choke off pesky price pressures, it entails real risks for the economy that could hurt the most vulnerable, who tend to lose jobs first in downturns.
avoid taking too defensive a position.
If the Fed signals that it may lift rates sooner and market-based financial conditions tighten in response — often the case with central bank communications — it could make borrowing more expensive and slow the economy. In that event, it might take longer for the labor market to reach full strength.
“Why do we have bottlenecks?” Ms. Daly asked on Twitter on Wednesday. “Newly vaccinated people are spending, so we have a ‘freedom-induced demand spurt.’ Producers have to catch up. So ride through the temporary pops in inflation — the economy’s in transition.”
Mr. Evans said he wished people who fretted about an overheating economy would explain precisely how high they thought inflation was about to go — and how the economy was going to get to a place where prices remained sustainably hotter.
“I really wish that people who say they’re concerned about inflation, that they would sort of fill in the dots on exactly what kinds of numbers are you talking about,” Mr. Evans said.
He also expressed comfort in the possibility that wages might rise, even if companies didn’t have the pricing power to pass that on as inflation, forcing businesses to eat higher costs and cutting into their profits.
“If wages go up, if labor share was to increase relative to capital share, I mean, I’m kind of agnostic about that,” Mr. Evans said. “We saw labor share fall over a long period of time, and if we didn’t get our nose out of joint then, why would we get our nose out of joint when labor share goes up?”
Federal Reserve officials pushed back on Thursday against concerns raised by two prominent economists — Lawrence H. Summers, the former Treasury secretary, and Olivier J. Blanchard, a former chief economist at the International Monetary Fund — that big government spending could overheat the economy and send inflation rocketing higher.
Those warnings have grabbed headlines and spurred debate over the past two months as details of the federal government’s $1.9 trillion pandemic relief bill came together. Mr. Summers in particular has kept them up since the legislation passed, saying it was too much on the heels of large spending packages last year. He recently called the approach the “least responsible” fiscal policy in 40 years while predicting that it had a one-in-three chance of precipitating higher inflation and maybe stagflation, or a one-in-three chance of causing the Fed to raise rates and pushing the economy toward recession.
But two leaders at the Fed, which is tasked with using monetary policies to keep inflation steady and contained, gave little credence to those fears on Thursday. Richard H. Clarida, the central bank’s vice chairman, and Charles Evans, the president of the Federal Reserve Bank of Chicago, both responded to questions specifically about Mr. Summers’s and Mr. Blanchard’s warnings.
“They have both correctly pointed out that the U.S. has a lot of fiscal support this year,” Mr. Clarida said on an Institute of International Finance webcast. “Where I would disagree is whether or not that is primarily going to represent a long-term, persistent upward risk to inflation, and I don’t think so.”
9.5 million jobs that were lost during the pandemic are still gone — and that the effect of the government’s relief spending would diminish over time. He also said that while spenders had pent-up demand, there was also pent-up supply because the service sector had been shut for a year.
“At the Fed, we get paid to be attentive and attuned to inflation risks, and we will be,” Mr. Clarida said. But he noted that forecasters didn’t see “undesirable upward pressure” on inflation over time.
Mr. Evans told reporters on a call that he wasn’t sure what “overheating” — the danger that top economists have warned about — actually meant.
“First off, there’s a conversation of is this the best way to spend money,” he summarized, adding that he didn’t have anything to say about that. “But then there’s sort of like, ‘Oh, this is so much that it is going to overshoot potential output, and there’s a risk that we’re going to get overheating, and then inflation.’”
He continued: “What is the definition of overheating? It’s a great word, it evokes all kinds of images, but it’s kind of like potential output is always a strange concept anyway. Can output be too high?”
a decade when inflation spiraled up and out of control in America, Mr. Evans said. “This isn’t the ’70s. We’ve had trouble getting inflation up.”
Inflation has been weak in the United States, and in advanced economies broadly, the past two decades. To try to keep that from turning into a bigger problem, the Fed has been working to “re-anchor” consumer and market expectations to prevent inflation slipping lower. The central bank announced last year that it would begin to aim for 2 percent annual price gains on average over time, allowing for periods of greater increases.
Still, no Fed policymaker wants inflation to suddenly spike, eroding consumer purchasing power. If that happened, the Fed might have to lift interest rates rapidly to slow down the economy, throwing people out of work and possibly causing a recession. That’s what Mr. Summers and Mr. Blanchard are warning about.
Frequently Asked Questions About the New Stimulus Package
The stimulus payments would be $1,400 for most recipients. Those who are eligible would also receive an identical payment for each of their children. To qualify for the full $1,400, a single person would need an adjusted gross income of $75,000 or below. For heads of household, adjusted gross income would need to be $112,500 or below, and for married couples filing jointly that number would need to be $150,000 or below. To be eligible for a payment, a person must have a Social Security number. Read more.
Buying insurance through the government program known as COBRA would temporarily become a lot cheaper. COBRA, for the Consolidated Omnibus Budget Reconciliation Act, generally lets someone who loses a job buy coverage via the former employer. But it’s expensive: Under normal circumstances, a person may have to pay at least 102 percent of the cost of the premium. Under the relief bill, the government would pay the entire COBRA premium from April 1 through Sept. 30. A person who qualified for new, employer-based health insurance someplace else before Sept. 30 would lose eligibility for the no-cost coverage. And someone who left a job voluntarily would not be eligible, either. Read more
This credit, which helps working families offset the cost of care for children under 13 and other dependents, would be significantly expanded for a single year. More people would be eligible, and many recipients would get a bigger break. The bill would also make the credit fully refundable, which means you could collect the money as a refund even if your tax bill was zero. “That will be helpful to people at the lower end” of the income scale, said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting. Read more.
There would be a big one for people who already have debt. You wouldn’t have to pay income taxes on forgiven debt if you qualify for loan forgiveness or cancellation — for example, if you’ve been in an income-driven repayment plan for the requisite number of years, if your school defrauded you or if Congress or the president wipes away $10,000 of debt for large numbers of people. This would be the case for debt forgiven between Jan. 1, 2021, and the end of 2025. Read more.
The bill would provide billions of dollars in rental and utility assistance to people who are struggling and in danger of being evicted from their homes. About $27 billion would go toward emergency rental assistance. The vast majority of it would replenish the so-called Coronavirus Relief Fund, created by the CARES Act and distributed through state, local and tribal governments, according to the National Low Income Housing Coalition. That’s on top of the $25 billion in assistance provided by the relief package passed in December. To receive financial assistance — which could be used for rent, utilities and other housing expenses — households would have to meet several conditions. Household income could not exceed 80 percent of the area median income, at least one household member must be at risk of homelessness or housing instability, and individuals would have to qualify for unemployment benefits or have experienced financial hardship (directly or indirectly) because of the pandemic. Assistance could be provided for up to 18 months, according to the National Low Income Housing Coalition. Lower-income families that have been unemployed for three months or more would be given priority for assistance. Read more.
The $1.9 trillion measure that the Biden administration ushered through Congress added to a $900 billion relief package enacted in December and a $2 trillion package last March.
Mr. Blanchard, in a March 5 post on Twitter, compared the fresh government spending to a snake swallowing an elephant: “The snake was too ambitious. The elephant will pass, but maybe with some damage.”
He more recently said that he had “no clue as to what happens to inflation and rates” but that there is a lot of uncertainty and that things “could go wrong.”
Feb. 4 Washington Post column that, while it was hugely uncertain, “there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation.”
He said in a Bloomberg Television interview last week that “we are running enormous risks.”
But Fed officials don’t think big government outlays will be enough to rewrite the world’s low-inflation story. And if it does stoke a slightly faster pickup, that might be a welcome development.
Mr. Clarida acknowledged that price gains were likely to speed up over the next few months, but said he expected most of that “to be transitory” and for inflation to return to “or perhaps run somewhat above” 2 percent in 2022 and 2023.
“This outcome would be entirely consistent with the new framework we adopted in August 2020,” he said.