30.05.2021 – 13:16
The Federal Reserve needs to explain how it will respond to rising inflation. The “average inflation targeting” system remains unclear
The inevitable has begun, writes The Economist. The consumer price index (CPI) in America, in March, was 2.6% higher than a year ago, when prices fell after the pandemic hit. Inflation growth from 1.7% in February was the largest since 2009, the last time the economy was recovering from a deep shock. More high-profile months are expected, by the standards of rich countries. The CPI could reach over 3.5% by May. In the special price index used by the Federal Reserve, inflation will soon rise above the Central Bank target of 2%.
The Federal Reserve is not worried about higher inflation, which reflects what happened a year ago. However, the central bank has an inflation problem, which will become a concern when the economic recovery exerts constant pressure on prices. The new monetary policy framework, adopted in August, indicates that it will temporarily push inflation higher than it normally intended in the aftermath of recessions in order to offset losses. The problem is that no one knows how much, or for how long, she wants inflation to be overcome after the pandemic. With the risks of a major inflationary episode, uncertainty is a source of uncertainty.
The idea behind “targeting average inflation” is to ensure that inflation stays at an average of 2% throughout the full economic cycle, rather than remaining low over time due to recessions. This is a good correction of the old system, which took a long time to recover the economy after the global financial crisis, partly due to a misguided fear of inflation.
However, the new framework remains unclear. Richard Clarida, the deputy chairman of the Federal Reserve, has suggested that it means waiting a while for inflation and employment targets to be met, before interest rates rise, and then operating as normal – more or less like a driver. that waits and does not brake until the car appears ahead, regardless of the stopping distance. Other Federal Reserve officials have hinted that they want to gain more ground from the losses caused.
But it is unclear whether the measurements should be carried out starting in March 2020, when the current crisis hit, or in August, when the new system went into effect. If spring is involved, there are shortages; if the measurements are carried out from August, there is no shortage, because prices have risen at an annual rate of more than 2% since autumn. The Federal Reserve, on the other hand, could argue that, as long as long-term inflation expectations remain close to its target, there is no need to go too far, as the target has already been set at an average of 2%. Policymakers also disagree on how far it is reasonable to go temporarily, in the name of gaining losses.
Central bankers often have differing opinions about the state of the economy, or the potential impact of their monetary policy decisions. The most unusual is the failure to articulate what they intended. Uncertainty is contributing to uncertainty over inflation and interest rates and it has also been heightened by the new circumstances of the pandemic and the huge fiscal stimulus by President Joe Biden.
A gap has opened up between financial markets, which expect the Federal Reserve to raise interest rates in 2022, and among ordinary monetary policymakers, who do not expect rates to rise until 2024. Investors are also weighing the growing risk that inflation may stay above the Federal Reserve target for some time.
Jerome Powell, chairman of the Federal Reserve, has said he is deliberately avoiding committing to a numerical rule. Sometimes central bankers need to avoid excessive specificity. But sooner or later, the Federal Reserve must decide what it wants as inflation rises. It should do so soon. / Monitor
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