Fed set to look beyond possible post-pandemic inflation shock
- 25 January 2021
Between the closed theaters and restaurants, the prices slashed by airlines and half-empty hotels, and the government benefits paid or in the pipeline, Americans may have as much as $2 trillion in extra cash socked away by this spring, APA reports citing Reuters.
For the Federal Reserve, that is both blessing and curse: fuel for the economic recovery once coronavirus vaccines take hold and people can travel and shop freely, but also the possible spark for a surge in prices that policymakers already are bracing to explain.
Fed policymakers have little doubt that costs for many goods and services will jump this year, a bitter pill for consumers if gasoline, travel and other prices start to rebound from sharp declines last year. But, Fed officials argue, that’s part of getting back to normal, not the start of a more persistent inflation problem.
“As people return to their normal lives ... there could be quite exuberant spending and we could see upward pressure on prices,” Fed Chair Jerome Powell told a Princeton University seminar earlier this month.
“The real question is how large is that effect going to be and will it be persistent?” Powell said. “A one-time increase in prices ... is very unlikely to mean persistently high inflation.”
Powell and other Fed officials will likely reinforce that message after their two-day policy meeting this week.
Few if any changes are expected to the Fed’s policy statement and no new economic forecasts are scheduled to be released.
But Powell will likely address inflation in his post-meeting news conference. Indeed, he and other top Fed officials in recent days have rolled out a sort of public service announcement about what’s ahead: Ignore the coming sticker shock, they say, because even if inflation moves above the Fed’s 2% target this year, it likely won’t last and won’t change the central bank’s very long horizon for lifting interest rates.