Fed can't ignore even fleeting inflation

The Fed says sharp increases in some prices reflect "transitory factors"

  
The Federal Reserve building is set against a blue sky, amid the coronavirus disease (COVID-19) outbreak, in Washington, U.S., May 1, 2020.

The Federal Reserve building is set against a blue sky, amid the coronavirus disease (COVID-19) outbreak, in Washington, U.S., May 1, 2020.

REUTERS/Kevin Lamarque

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

WASHINGTON - Even temporary inflation presents a problem for the Federal Reserve. The U.S. central bank on Wednesday reiterated its belief that post-pandemic price spikes won’t last. Still, consumers, Congress and the White House are edgy. Tapering the Fed’s $120 billion a month in additional bond buying wouldn't directly counter price increases. But it would give Chair Jay Powell cover.

On Wednesday, the Federal Open Market Committee kept overnight interest rates near zero and said it would continue the asset purchases that started last year. The move has nearly doubled the Fed’s balance sheet since the emergence of the coronavirus to about $8.2 trillion.

The Fed says sharp increases in some prices reflect "transitory factors." Powell and his colleagues aren't concerned that the consumer price index gained 5.4% in June year-over-year, the biggest increase in 13 years. There's some logic behind that view, given the distortions of the past year-and-a-half. Since the more normal environment in June 2019, CPI increased a much less alarming annualized 3%. The longer-term inflation rates implied by bond markets have declined slightly from their peaks in recent months, too.

Consumers, though, are less sanguine. Their inflation expectations for the coming year jumped to 4.8%, the highest level since August 2008, according to a University of Michigan survey this month. Gas prices in particular have hit drivers' wallets, rising 45% over the last 12 months. Democratic pollster Celinda Lake told Axios that women voters, a key constituency going into the 2022 midterm elections, are especially concerned.

The Fed won't be raising interest rates any time soon. But it could reduce its bond buying. In 2013, comments foreshadowing tapering by then-Fed chief Ben Bernanke rattled markets, but only temporarily. The central bank went on to pare its bond buying program and then started reducing the size of its balance sheet in 2017.

Powell and his colleagues have little choice but to cut asset purchases once they are confident the worst of the pandemic is over. Despite its independent structure, the Fed can't completely ignore politics, either. The bond-buying program is meant to temper long-term interest rates, and shrinking it won’t affect current food or gas prices. But that wouldn't stop politicians and voters from seeing it as a first move to control inflation. Getting to that point soon could make both economic and political sense for the Fed.

CONTEXT NEWS

- The U.S. central bank’s Federal Open Market Committee on July 28 left the target range for the federal funds interest rate unchanged at 0% to 0.25%. The committee also said it would continue buying $120 billion in Treasury and mortgage-backed securities each month, a program that began in 2020 to offset economic damage from the pandemic.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Richard Beales and Amanda Gomez) ((For previous columns by the author, Reuters customers can click on CHON/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | gina.chon@thomsonreuters.com; Reuters Messaging: gina.chon.thomsonreuters.com@reuters.net))


More From Global