WASHINGTON, Oct 19 Reuters: If high inflation continues through the end of this year, Federal Reserve Governor Christopher Waller may have to adopt a more aggressive policy response to control it, Fed officials 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 believes the economy has still 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 closer toward 2%, the Fed's established target.
That would mean any change in the Federal Reserve's key policy interest rate is still some time off. Waller said he feels the risks are shifting and he is concerned that the current fast rise in prices will continue.
The consumer price index has risen over 5% annually for four months in a row, a trend which has not been seen since 1990.
The next several months are critical for assessing whether the transitory inflation numbers we've seen are high, Waller said in remarks prepared for delivery at the Stanford Institute for Economic Policy Research. If monthly inflation prints continue to run high through the remainder of this year, a more aggressive policy response than just tapering might very well be warranted in 2022. Tapering refers to the Fed's evolving plan to scale back its annual $120 billion in monthly bond purchases as a precursor to any interest rate increase, a process Waller says should begin after the Fed's November meeting.
The tapering is expected to be completed by the middle of next year.
Fed officials are currently divided between those who feel a rate increase will be needed next year and those who see liftoff coming later.
Waller cautioned that one common argument - - that current inflation is not of concern because it is driven by outsized and likely one time increases in things like used auto prices - may miss the point. If one time price rises rotate between enough goods, it could push overall inflation higher than desired.
Firms are reporting that they have more pricing power than they have in many years, as consumers seem to be accepting higher prices, he said. One needs to avoid selectively ignoring data series - be it used car prices, food and energy price, or household surveys of inflation expectations. One should ignore outliers and dismiss them as 'bad data’.