Federal Reserve policymakers seem a bit confused—or they are deliberately sending mixed messages—as pressure grows for them to do something in the face of increasing evidence that inflation is on the rise and no one can be sure that is a passing phenomenon.
The core personal consumption expenditures index—which is the Fed’s preferred measure of inflation—rose 3.1% in April from a year ago, and 0.7% from March, higher than consensus forecasts in each instance. The full index, including the volatile food and energy prices not in the core indicator, jumped 3.6% on the year.
Fed officials have been saying, ad nauseam, that inflation will run higher this spring because of the so-called base effect of depressed prices with the onset of the pandemic while reassuring investors this would be transitory.
The fact that economists, who are willing to give them the benefit of the doubt, are low-balling inflation forecasts should give them pause, however,
Both vice chairmen of the Fed board of governors allowed that this kind of data could lead the Federal Open Market Committee to consider tapering the $120 billion monthly asset purchases.
Richard Clarida, the traditional vice chairman, referred to minutes of the late-April FOMC meeting about when that might occur. “There will come a time in upcoming meetings we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases,” the Columbia University economist said in an interview with Yahoo Finance.
Randal Quarles, who occupies the relatively new position of vice chairman for regulation, was even more specific, stating at a Brookings Institution event:
“My personal view is that the rise in inflation—even after discounting temporary factors—and inflation expectations since December will prove sufficient to satisfy the standard for inflation in the guidance around asset purchases later this year.”
He added, though, that improvement in the labor market was slower than he expected. The jobs report for May, due out this coming Friday, will be closely watched for indications that hiring is rebounding after the April figures were disappointingly low. Estimates put expected job gains for May at about 675,000 after the 266,000 reported for April.
Dallas Fed President Robert Kaplan kept up his own crusade for the FOMC to consider tapering. Last week, he zeroed in on the $40 billion a month the Fed spends acquiring mortgage-backed securities as having unintended consequences in contributing to excesses in the housing market. He also warned that some inflationary pressures, such as capital spending and energy transition, may not be as transitory as his Fed colleagues think.
FOMC members have latched on to Fed Chairman Jerome Powell’s quip that they are “talking about talking about tapering,” as San Francisco Fed chief Mary Daly put it in a CNBC interview last week. That catchy phrase has grown tiresome with repetition and policymakers need to be clearer in their communication if they want to avoid misleading investors.
Fed Focus Off-focus?
Pennsylvania’s Pat Toomey, the senior Republican on the Senate Banking Committee, for one, would like to see Fed officials focus more on monetary policy. He sent a letter last week to the heads of Fed regional banks in Boston, Atlanta, and Minneapolis complaining about what he called “their obsession with race.”
“It is not the proper role of the Federal Reserve to be engaging in political advocacy,” Toomey wrote. He criticized studies, papers, and blog posts from the banks as suffering “from severe bias.”
Racism is “abhorrent,” he acknowledged, but the subject of race and the economy is “fraught with ideological assumptions and interpretations.” Whatever merit some saw in the events devoted to the topic, Toomey added, “it is perplexing why they should be undertaken by a regional Federal Reserve Bank.”
Toomey is hardly a right-wing Republican. He was one of seven Republican senators who voted in February to convict former President Donald Trump on the House’s article of impeachment. He missed last week’s vote on impaneling a bipartisan commission to investigate the Jan. 6 Capitol breach due to a family commitment, but said he would have voted in favor of advancing the bill (the motion, which needed 60 votes to surmount filibuster, lost 54-35).
His letter, however, is one of the ways top committee members wield power. He requested the three bank chiefs—Eric Rosengren, Raphael Bostic, and Neel Kashkari—to send him documents and briefings by the second week of June. They will almost certainly comply with his request.
There are certainly arguments for the Fed banks to take a more expansive view of their role, but the Toomey letter shows the hazards of taking on highly charged social issues in the country’s hyper-partisan atmosphere.
Several economists are cautioning that inflation disproportionately affects low earners and contributes to inequality. Keeping a lid on inflation is squarely within the Fed’s bailiwick and might be the best way for the central bank to contribute to social justice.