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Fed President Believes Inflation May Be Higher In 2021

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EDITOR NOTE: Inflation may be a lot higher than we expect, so goes the message that St. Louis Fed President James Bullard told reporters yesterday. Not everyone at the Fed agrees. On one hand, as we covered in another piece this week, the velocity of money--its circulation across the economy--hasn’t picked up, lending itself to the case for “deflation” not “inflation.” Yet Bullard sees “supply constraints,” a consequence of the current and ongoing pandemic, as a major factor that can make prices more volatile and push them higher at a much faster rate than expected. Hence, inflation may soar higher and faster. Similar to driving a car, where the potential for an injurious (or fatal) accident is omnipresent but never expected, it’s time to put on our “financial safety belt,” and hedge the value of our purchasing power with non-CUSIP gold and silver. There’s nothing else to protect your wealth that’s NOT going to be devalued by the coming inflationary trend.

The U.S. economy may soon experience higher inflation than has been seen for quite some time, said St. Louis Federal Reserve President James Bullard on Thursday.

In a conversation with reporters following a talk with a business group in Little Rock, Arkansas, Bullard also said he thinks the economy is going to recover “quite a bit faster” than most economists expect.

On inflation, Bullard said his bank has gotten reports of supply constraints of various kinds that are intense and led to big increase in prices.

“The quiescence of inflation that has characterized the last decade may not be a good guide for what’s going to happen in 2021, where I would expect more volatile pricing, possibly higher inflation than we’re used to,” Bullard said.

U.S. Treasury yields have been rising in the past few weeks with investors expecting the economic recovery from the coronavirus pandemic will lead to higher inflation.

However, one of Bullard’s colleagues, Charles Evans, the president of the Chicago Fed, is much less optimistic that inflation will move higher.

Evans said recently it will “take years” to get inflation to average 2%, which is the Fed’s target.

In remarks to reporters Thursday, Evans was skeptical that inflation would increase earlier.

“We just have to experience inflation before I’m going to feel confident that things are really changing,” Evans said. “Show me the inflation. We need to see it,” he said.

The latest Federal Reserve forecast basically sees the economic recovery taking three years, but many forecasters, including some Fed officials are worried the economy will stumble in the current quarter.

See: Fed’s Harker sees ‘significant slowdown’ in U.S. economy in first three months of year

However, Bullard said said he thinks 2020 fourth quarter GDP growth will be stronger than expected and this will carry over into this year.

Bullard said he thought that households have saved a fair amount last year and this will be able to tide them over in the first few months of this year.

“So I actually think we’ll be ok through the first quarter and then from there, we’ll see how the vaccines are able to limit the health crisis,” he said. Bullard said he expects a successful roll-out of the vaccines.

“I think things are going to better than are typically forecast and that the recovery will occur quite a bit faster than most forecasters have in mind,” Bullard said.

The St. Louis Fed president said it was premature to discuss when the Fed might start to taper its asset purchase program.

The Fed has told the market it will continue its purchases of $120 billion of Treasurys and mortgage-backed securities until it sees “substantial progress” toward its goal of full employment and 2% inflation.

Bullard said there is a lot of uncertainty remaining about the economic outlook due to the pandemic.

“It would be inappropriate to tie things down to a specific date,” Bullard said.

U.S. stocks were higher on Thursday as investors cheered some new economic data and Congress’s confirmation of President-elect Joe Biden’s election. The Dow Jones Industrial Average DJIA, 0.27% was up 202 in mid-afternoon trading.

Originally posted on MarketWatch

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