The
US Federal Reserve's carefully crafted move last year to
a jobs-first monetary policy, touted as giving workers their best chance after
the pandemic, is being tested by a potentially table-turning rebound of
inflation and what's become a relative rush of policymakers determined not to
let it get out of hand.
اضافة اعلان
When the Fed unveiled its new framework just 10 months ago,
with a view that employment could expand as much as possible as long as prices
did not rise too fast, the language was kept vague on key points in order to
maintain unanimous support. The limits to that "big tent" approach
are now becoming clear.
Three months ago a clear majority of policymakers saw no
rate increases for at least three years. Projections out last week showed fewer
than a third remain in that camp, with a larger block who see liftoff by the
end of next year on the basis of two months of strong inflation.
With a promised "broad and inclusive" jobs
recovery still elusive, analysts parsing that large and fast shift wondered if
the new framework was giving way to an old-school Fed debate over sacrificing
more extensive job growth to keep inflation at bay — a tradeoff the central
bank has acknowledged it too hastily accepted in the past.
The faster inflation and slower-than-expected employment
rebound have taken officials "in a direction they were not
expecting," said Nathan Sheets, a former Treasury official and chief
economist at PGIM Fixed Income. "Their framework is not designed so much
to manage through episodes of high inflation" as to boost inflation that
had been too low.
"It will be a more divided Federal Reserve than we have
seen during the pandemic. Being true to the framework and balancing the risks
is going to be a heavy lift."
Fed Chair Jerome Powell has said it's a feat that can be
pulled off.
Whether he and the Fed's other core policymakers remain
convinced they can support a robust jobs recovery and control inflation will be
the subject of intense interest in coming weeks, beginning on Tuesday when
Powell testifies before Congress.
Testing the commitment
The new framework has made one clear break with the past.
Across the board, policymakers say they'll accept a period
of inflation above the Fed's 2 percent target before raising short-term
interest rates from their near-zero level. That aims both to allow more people
to work — employment tends to grow when rates are lower and consumers spend
more freely — and to offset a decade of inflation shortfalls.
Those anticipating earlier and faster interest rate hikes
merely see inflation moving at a faster pace to, and for a time slightly above,
the 2 percent threshold, St Louis Fed president James Bullard said on Friday,
counting himself among the seven officials anticipating rate increases in 2022.
Bullard sees a preferred measure of inflation at 3 percent
in 2021 and 2.5 percent in 2022, and "that would meet our new framework
... Other members have other forecasts" that warrant later rate increases.
"This is very much a debate about what is going to
happen in 2022" with inflation, he said.
But it is also a debate that will measure how deep the
commitment to the new framework runs, what magnitude of inflation
"overshoot" different officials will tolerate, and how quickly the
Fed reacts if higher inflation persists.
The framework is silent on those and other issues critical
to key industries like autos and home building where sales are sensitive to
interest rates, and for households wondering how long prices may keep surging.
Those increases have been "salient" already for
households, yet the median of policymakers' projections sees three years of
above-target price increases, noted Randall Kroszner, a University of Chicago
Booth School of Business professor and former Fed governor.
While last week's shift in tone did not upend the new framework,
he said, it did show the risks and limits of its application at a complex point
in the economy's reopening.
Can the Fed “tolerate three years?” of higher inflation, he
said. “They have not been explicit … Nothing like this has happened before.”
The Phillips curve returns?
It's a debate that is also beginning to reflect what has not
changed at the Fed under the new framework.
Powell and others say that in order not to act prematurely
they are responding to realized data rather than forecasts.
Yet the meeting last week put forecasting — particularly
inflation forecasting — back at center stage. In the battle to shape market and
household expectations, the inflation forecasts of the likes of Bullard are now
pulling against the likes of Neel Kashkari, the Minneapolis Fed president who
thinks inflation will fade to the point where rates can be left at zero until
2024 at least.
"For me, the framework means, we really have to achieve
maximum employment and we have to sustainably achieve 2 percent on average over
time, and a few transitory high inflation readings do not meet the test for
me," Kashkari told Reuters on Friday.
Sixteen others are in the mix, too, with the framework
silent on any agreed-upon definition of critical concepts like "maximum
employment" to ground them.
Moreover, some aspects of the economy the new framework was
meant to downplay seem to still be at work.
The Fed's strategic shift deemphasized the so-called
Phillips Curve, a longstanding tenet that unemployment and inflation are
closely related and when one drops the other rises. Yet at his press conference
last week Powell spoke as if that was alive and well, and that if inflation
persists, it's because the labor market has gone as far as it can go.
Asked why inflation might remain above target in coming
years, Powell said that "by 2023, those increases are really about ...
rising resource utilization, or to put it a different way, low
unemployment."
In navigating its new approach, it's now a race over how
fast and fully the sometimes competing aims of maximum employment and stable
prices arrive where the Fed wants them, and whether they get desperately out of
sync along the way.
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