US inflation is unlikely to get out of control despite the unprecedented government spending that has been authorized in response to the COVID-19 pandemic, US Federal Reserve officials said on Wednesday.
“Our baseline view is that inflation is going to be close to our long-run objective of 2 percent, but we will be vigilant,” Fed Vice Chairman Richard Clarida told CNBC in a television interview.
“I think what the data is telling us now is there is going to be some upward movement as we reopen, but that it won’t persist over a long period of time, and that’s my view as well,” he said.
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Clarida’s comments chimed with those from a spate of other US central bankers, including from officials who have long held dovish positions on policy, such as Chicago Fed President Charles Evans, as well as some who have taken more hawkish stances in the past, such as Boston Fed President Eric Rosengren and Cleveland Fed President Loretta Mester.
“The hawks are now doves,” Neil Dutta, head of US economics at Renaissance Macro Research LLC, said in an e-mail.
Fed officials want to ensure that investors and the US public are not alarmed by higher inflation readings in the coming months as the economy reopens, a phenomenon many expect would be temporary.
They are playing down the risk of economic overheating that has been raised by critics of US President Joe Biden’s ambitious spending plans.
“Given that inflation has run low for so long, some increase in inflation expectations and actual inflation would be a welcome development,” said Mester, who expects inflation to rise above the Fed’s 2 percent goal this year before moving back down next year.
“I wouldn’t consider the increase in inflation I expect this year to be the type of sustainable increase needed to meet the forward guidance on our policy rate,” she told the Boston Economic Club.
Fed officials at their meeting last week held interest rates near zero and reaffirmed that they would continue buying US$80 billion of Treasuries and US$40 billion of mortgage-backed securities per month until the economy had made “substantial further progress” toward their employment and inflation goals.
That would take “some time,” Fed Chairman Jerome Powell told a news conference afterward.
Clarida on Wednesday added that the policy-setting Federal Open Market Committee is “certainly not there yet,” referring to the timing of internal discussions on when to begin tapering purchases.
Rosengren also said it was premature to focus on tapering, although the conditions might be met before the end of the year.
He sounded open to reducing mortgage-backed securities buying faster than Treasuries when the time comes.
“I do think that as we think about tapering one of the things that we are going to have to think about is at what speed we taper the Treasuries versus the mortgage-backed securities,” he said in response to a question following a speech to the Boston College Carroll School of Management. “The mortgage market probably doesn’t need as much support now, and in fact, one of my financial stability concerns would be if the housing market gets too overheated.”
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