The Fed: Runaway inflation? Atlanta Fed’s Bostic ‘just not seeing it’

United States

Atlanta Federal Reserve President Raphael Bostic is not worried at all about the possibility of “runaway” U.S. inflation.

Bostic acknowledged the rate of inflation could surge in the coming months as the economy more fully reopens and growth speeds up. Yet in a talk with the Economic Club of New York he said he expects any increase to prove short-lived, a view held by virtually all senior officials at the central bank.

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“We are always on the lookout for runaway inflation, but right now we are just not seeing it,” he told reporters after the event.

Bostic pointed out that inflation has run below the Fed’s 2% goal for most of the past decade. “For many years it has been below our target and it has been a source of concern,” he said.

Inflation is likely to move higher in the short run, he said, because the economy is getting healthier. That’s raising demand for a variety of goods and putting upward pressure on prices.

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The current 12-month rate of inflation, using the Fed’s preferred core PCE price gauge, has moved up to 1.5% as of February from less than 1% early in the pandemic.

The Fed likes the core rate because it strips out food and energy, two categories that often undergo sharp price swings that distort the underlying rate of inflation.

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The central bank is aiming for an “average” rate of 2% inflation, meaning the Fed would be willing to tolerate a period of higher prices after a bout of low prices.

If inflation averaged 1.5% for a while, for instance, the Fed would be OK with prices rising at a 2.5% pace for a similar length of time.

The Fed’s unprecedented effort to prop up the economy during the coronavirus includes keeping a key short-term interest rate near zero and buying hundreds of billions of dollars in bonds to ensure consumers and businesses have access to cheap money.

Some Wall Street DJIA, +0.56% investors worry the Fed’s strategy, along with massive federal stimulus, could lead to a period of higher inflation.

Bostic said the Fed’ strategy was geared in part toward ensuring prices would rise to a level it considers optimal for the economy.

“It wouldn’t surprise me that inflation expectations are higher now than they were a year ago,” he said.

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Bostic said it will take awhile to get a good read on inflation and that he’d like to “wait and be patient” before deciding whether the Fed needs to interevene. He doesn’t expect that to be likely this year or even next.

We are going to have somewhat of a bumpy time with inflation in the coming months,” he said, “but I don’t see it as being a major concern.”