Fed Watch: Growing Concern About Inflation Doesn’t Faze The Fed

Even the normally unflappable Warren Buffett is getting worried about inflation.

“We are seeing substantial inflation," Buffett said during the virtual annual shareholder meeting for his Berkshire Hathaway (NYSE:BRKa) holding company on Saturday.

“We are raising prices. People are raising prices to us, and it’s being accepted.”

Buffett’s not the only one who is worried. According to Bank of America, corporate executives have mentioned inflation in first-quarter earnings calls three times as often as they did a year ago.

None of this seems to faze Federal Reserve Chairman Jerome Powell, who last week repeated his assurances that policymakers expect a “transitory” uptick in inflation. His formulation of the Fed stance on inflation is sounding less like a mantra and more like a broken record.

Inflation Expectations Remain "Anchored" At 2%

Powell said this transitory increase in inflation will be due mostly to the base effect—year-on-year readings will look high after the pandemic caused indexes to decline—and supply-chain bottlenecks, which Powell, who is not running a company, evidently expects to be resolved quickly.

And even if somehow inflation exceeds the Fed’s optimistic expectations, not to worry, the Fed knows what to do with inflation.

“If, contrary to expectations, inflation were to move persistently and materially above 2% in a manner that threatened to move longer term inflation expectations materially above 2%, we would use our tools to bring inflation and expectations down to mandate-consistent levels,” Powell said at the press conference Wednesday following the two-day meeting of the Federal Open Market Committee.

One journalist asked the Fed chairman how he could be so sure that the Fed would be able to put a lid on runaway inflation, given the lags in monetary policy effects. Powell sidestepped that question to assert once again that the Fed knows what it’s doing and repeating his claim that inflation expectations are “anchored” at 2%, so that investors won’t panic even in the face of “one-time price increases.”

Market readings of inflation, however, are already at 2.4 to 2.5% over the next five to 10 years. Analysts calculate that even the Fed’s preferred inflation measure—the personal consumption expenditures price index  which runs a little lower than the consumer price index—will hit above 2.5% in April and May after stripping out volatile food and energy prices.

The question is whether investors will weigh anchor and start looking for a faster, long-term rate of price increases.

Supply-chain shortages of steel, copper, and other commodities—not to mention the global shortage of silicon chips that is crippling automobile production along with other manufacturing—may be more than transitory. The yawning gap in skilled labor is also not susceptible to quick fixes.

A chink appeared in the united front of Fed policymakers on this question on Friday, when a hawkish Dallas Fed president, Robert Kaplan, called into question the central bank’s commitment to maintain its bond purchases at $120 billion for the foreseeable future.

“At the earliest opportunity, I think it will be appropriate for us to start talking about adjusting those purchases,” Kaplan said during a talk with a local chamber of commerce in Texas.

Kaplan’s raising the question seems to defy Powell’s insistence that he doesn’t even want to begin talking about talking tapering.

There were no dissents from the Fed’s consensus statement following last week’s meeting, though Kaplan, who is not a voting member of the FOMC this year, was not among those approving the commitment to keep up monetary accommodation until “substantial further progress” had been made toward maximum employment and price stability, which now means an average 2% over an unspecified period of time.

Mohamed El-Erian, a former CEO of Pimco and now an adviser to Allianz, was busy last week warning that the Fed is running a big risk of falling behind and could cause serious disruptions if inflation forces it to play catch-up. El-Erian told CNBC:

“I’m really worried that what they hope is transitory inflation is going to end up being persistent inflation.

“If we end up in a persistent inflation world, they’re going to have to slam on the brakes, and the market reaction then will be much worse than it would be if they just tapered a little bit now.”

So maybe this veteran market analyst can join Kaplan and Buffett for a cup of coffee to lament the Fed’s stubborn refusal to take timely action.