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Fed Rep R. Clarida Tries to Quiet Inflation Expectations

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EDITOR NOTE: The Fed had expected to see inflation run above its 2% target when they decided to implement a 2% averaging policy. Richard Clarida, whose actions at the Fed would put him in the centrist camp, between doves and hawks, is simply reiterating this view. What’s at stake here is not inflation running higher than 2%, but rather, the strategic assumption that the Fed can rein it back in once it begins exhibiting runaway tendencies. It’s a delicate operation and one that can turn quickly with the slightest miscalculation or misstep. With the Fed’s focus on the labor market--are runaway inflation expectations contingent on the rate of employment (the possibility of wage inflation)? Or, did the Fed already screw itself (and America) by abnormally boosting the money supply--poisoning the economic well with additional yet unclean water at the outset only to attempt filtering out the toxins later?

Federal Reserve Vice Chairman Richard Clarida acknowledged that he was surprised by April’s jump in consumer prices but argued that the rise in inflation was likely to be prove largely transitory.

“Readings on inflation on a year-over-year basis have recently increased and are likely to rise somewhat further before moderating later this year,” he told a meeting of the National Association for Business Economics on Wednesday. However, “I expect inflation to return to -- or perhaps run somewhat above -- our 2% longer-run goal in 2022 and 2023.”

U.S. consumer prices climbed in April by the most since 2009, bringing the year-on-year increase to 4.2%, amid a record increase in used-car costs, the Labor Department reported on Wednesday. The news drove stock and bond prices lower.

Calling April’s numbers “one data point,” Clarida said inflation was being boosted by base effects -- current price levels are elevated compared to depressed readings a year ago, when the economy was virtually shut down to contain Covid-19 -- and by some supply bottlenecks.

“We have pent-up demand in the economy,” he said “It may take some time for supply to rise up to demand.”

Former Treasury Secretary Lawrence Summers voiced unease Wednesday with the Fed’s argument that the rise in inflation will prove to be temporary.

“I am very concerned that the Fed’s analytical assessment that inflation is transitory, combined with its policy move toward not being pre-emptive with respect to inflation, will be to repeat the mistakes of the 1960’s and 1970’s” when inflation surged, Summers, who is a paid contributor to Bloomberg, told an Institute of International and European Affairs webinar.

Clarida repeatably said that the Fed was prepared to act if inflation or inflation expectations rose to undesirable levels.

Won’t Hesitate

“If we saw evidence that there was a risk of a persistent upward drift in inflation expectations we would not hesitate to use our tools to offset that,” he said.

Still, he suggested that the Fed is some ways away from scaling back the massive stimulus it is providing to the economy.

“The economy remains a long way from our goals, and it is likely to take some time for substantial further progress to be achieved,” he said.

The Fed is currently buying $120 billion of assets per month -- $80 billion of Treasury securities and $40 billion of mortgage backed debt -- and has pledged to keep up that pace “until substantial further progress” has been made toward its goals of maximum employment and 2% average inflation.

Clarida was upbeat on the outlook for the economy, saying it he expects it to “pick up steam” this year.

But like other forecasters, he said he had been surprised by last week’s news of a smaller-then expected rise in U.S. payrolls in April.

“The near-term outlook for the labor market appears to be more uncertain than the outlook for economic activity,” he said, adding that it may take some time to match workers to the jobs that are available for them after the pandemic.

“This was an unprecedented shock,” he said. “We need to be humble and really draw lessons from the data.”

Originally posted on Yahoo! Finance

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