“My view is that this acceleration in the rate of price increases is likely to prove temporary,” Eric Rosengren, the president of the Federal Reserve Bank of Boston, said in a speech Wednesday. “Toilet paper and Clorox were in short supply at the outset of the pandemic, but manufacturers eventually increased supply, and those items are no longer scarce.”
Still, Mr. Rosengren counseled vigilance, saying the Fed should pay attention to make sure the economy has not changed in ways that will make wages and prices more responsive to a tightening labor market.
Michelle Bowman, one of the Fed’s six Washington-based governors, said that it was unclear how long it would take supply bottlenecks to clear up, creating a source of uncertainty about inflation — but that it seemed most likely that price gains would stay contained.
“At this point, the risk that inflation remains persistently above our long-run target of 2 percent still appears small,” she said, according to prepared remarks released Wednesday morning. “I am encouraged by the recent pace of the economic recovery, and I remain optimistic that this strength will continue in the coming months.”
If prices take off, the Fed could dial back its buying or lift rates. Either move would make borrowing more expensive, likely slowing the economy and denting the stock market.
“Our baseline view is that we don’t overheat,” Mr. Clarida said. “If there are unforeseen, persistent upward pressures on prices,” then “we would use our tools to bring it down.”
Historically, abrupt Fed policy changes have at times set off recessions. That’s why some economists are worried. If the Fed is forced to act to choke off pesky price pressures, it entails real risks for the economy that could hurt the most vulnerable, who tend to lose jobs first in downturns.
Article source: https://www.nytimes.com/2021/05/05/business/economy/federal-reserve-overheating-worries.html
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