WASHINGTON Reuters - If high inflation continues through the end of the year, the Fed may have to adopt a more aggressive policy response to control it, Federal Reserve Governor Christopher Waller said in remarks on Tuesday outlining the case for why Fed officials may have misdiagnosed the current pace of price increases as temporary
Waller said he still believes the economy has seen the worst of the current coronavirus wave, that labor and other supply shortages will ease over time and that the escalation of inflation will be transitory. I still see supply and demand working here to moderate price increases so that inflation moves back toward 2%, the Fed's established target.
This would mean any change in the Federal Reserve's key policy interest rate is still some time off. However, Waller said he feels the risks are shifting and he is now strongly concerned that the current fast rise in prices may continue.
The consumer price index has risen for four months in a row at a more than 5% annual rate, a run that has not been seen since 1990.
The next several months are critical for assessing whether the high inflation numbers we have seen are transitory, Waller said in remarks prepared for delivery at Stanford Institute for Economic Policy Research. If monthly print of inflation continue to run high through the remainder of this year, a more aggressive policy response than just tapering may be warranted in 2022. Tapering refers to the Fed's evolving plan to scale back its monthly $120 billion in bond purchases as a prelude to any interest rate increase, a process Waller says should begin after the Federal Reserve's November meeting.
The trimming should be completed by the middle of next year.
Fed officials are currently divided between those who think a rate increase will be needed next year and those who see liftoff coming later.
Waller cautioned that one common argument - that currently inflation is not of concern because it is likely driven by outsized and likely one-time increases in things like used auto prices - may miss the point. If one time price increases rotate among enough goods, it could push total inflation higher than desired.
Firms reported that they have more pricing power now than they had in many years, as consumers seem to be accepting higher prices, he said. When selectively ignore data series - - be it used car prices, food and energy prices, or household surveys of inflation expectations - one needs to be careful. One should exhibit caution in dismissing data as outliers.