“While it might be tempting to err on the side of caution, the potential costs associated with an excessively large balance sheet should not be ignored,” she said. She suggested that shrinking the balance sheet could allow policymakers to raise rates, which are currently set near-zero, by less.
Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, also argued for an active — albeit still gradual — path toward removing policy help.
The Fed is not behind the curve, she said on a Reuters webcast, but it needs to react to the reality that the labor market appears at least temporarily short on workers and inflation is running hot. Prices picked up by 5.8 percent in the year through December, nearly three times the 2 percent the Fed aims for on average and over time.
“We’re not trying to combat some vicious wage-price spiral,” Ms. Daly said. Still, she said she could support a rate increase as soon as March, and hinted that four rate increases could be reasonable, a path that would slow things down while “not pulling away the punch bowl completely and causing disruptions.”
Inflation F.A.Q.
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Even so, she said it would be “misinformation” to suggest that officials are coalescing around a clear path forward — the Fed will have to figure out how rapidly rates will increase as it learns more about the economy.
Wall Street economists increasingly expect a rapid pace for rate increases this year: Goldman Sachs and J.P. Morgan both expect five rate moves in 2022, and some Fed watchers have suggested as many as seven are possible. Markets are pricing in a small but meaningful chance that the Fed is going to raise rates by a half-point in March, instead of a more typical quarter-percentage-point increase.
Officials have been careful to emphasize that they do not know what is going to happen next with policy because the economy is so uncertain — rents are rising and supply chains remain messy, which could keep inflation elevated, but government support programs are waning, which could weigh down demand.
Article source: https://www.nytimes.com/2022/01/31/business/economy/fed-inflation-economy.html
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