Bloomberg Opinion Editorial Board
Inflation is too high to be considered transitory. Prices in the United States rose 7.0 percent in 2021, the biggest increase in nearly 40 years. Remember: The Fed’s inflation target is 2.0 percent, a fact that received less attention than previously thought, when the Dovish and Dovish biases measured the deviation to a tenth of a percentage point. This is a redundancy and some of it is likely to persist without corrective action.
The good news is that the Fed can no longer be accused of downplaying risks. Over the past two months, with signs of alarm, his political stance has changed from grit to concern. Central Bank Chairman Jerome Powell told lawmakers this week that he sees inflation as a “grave threat”. So far, to its credit, the monetary authority has managed to make this sudden change in messaging without shaking the financial markets. Investors expect the Fed to quickly scale back its bond-buying program and expect four interest rate hikes this year starting in March.
Will that quick programming suffice? It sounds reasonable, but with the pandemic away and new uncertainties surrounding the Omicron version, it’s impossible to be sure. The Fed should keep an open mind and be prepared to tighten or ease monetary policy as circumstances develop.
The reasons for the increase in prices are quite clear. Unprecedented supply chain disruptions have slashed production, while unprecedented financial and monetary stimulus has maxed out demand. Looking ahead, fiscal policy is likely to be much less aggressive (assuming stalled planning).build back betterIf eventually passed by President Joe Biden, it will probably only include a modest additional stimulus). And liberal monetary policy is slowly being rolled back. Even allowing for a spike in inflation This has the effect of loosening monetary policy (by lowering the real interest rate), the Fed is no longer intentionally stimulating demand.
However, when the demand side is more under control, the supply side remains a black box. The Omicron version is so permeable that it’s already causing serious new disruptions and ruining plans to return to normal. On the other hand, after two years of Covid-19, policy makers seem to be rethinking the balance between caution in controlling the disease and the economic disruption caused by the strict lockdown. Adding to these uncertainties are questions about the medium term and beyond. What kind of permanent changes, if any, will the pandemic bring to the way work is organized? And once savings, currently fueled by high property prices, begin to dry up, how many pandemic-related exits from the workforce will be reversed?
Right now, the job market is clearly tight. The unemployment rate is 3.9 percent and, more relevantly, there are clear signs that wages are rising in response to labor shortages and to offset rising prices. This initial spiral of wages and prices, if it continues, threatens to usher in part of the current inflationary growth and perpetuate it. In the coming months, this will be a key indicator for deciding whether the Fed’s corrective action is sufficient.
Amidst all the uncertainty, what is important is that the central bank is no longer seen as locked into a certain policy. Powell once again took advantage of this when he said on Tuesday that central banks would have to be “polite and nimble”. Absolutely.