The Federal Reserve has managed to do something that is rarely seen in the US these days: get members of the Democratic and Republican parties to agree.
At this year’s annual meeting of the American Economic Association, leading economists from both sides of the political spectrum argued that the Federal Reserve is behind the curve in the battle to contain a burst of inflation in an economy still beset by a pandemic.
And while they generally welcomed the Fed’s shift toward a tighter monetary stance and expect price pressures to ease this year, they seemed doubtful that inflation will slow as much as central banks forecast. They saw that it remained well above the 2% target of monetary policymakers.
Among those participating in the three-day virtual conference that ends Sunday: former Treasury Secretary Lawrence Summers and former White House chief economist Jason Furman, both Democrats, and prominent monetary economist John Taylor and former chairman of the Council of Economic Advisers. . Glenn Hubbard, who served in Republican administrations.
To be sure, not all economists, especially some on the left, are sounding the alarms about the threat of inflation and the Fed’s belated response.
Nobel laureate Joseph Stiglitz, who was chief White House economist for Democratic President Bill Clinton, urged the central bank for caution. He argued that higher interest rates would not solve the problem of global supply and shortages that have helped drive inflation. Furthermore, labor force participation remains far below what it could be.
The president of the FedJerome Powell is pressed on what he intends to do to curb inflation when he appears before the Senate Banking Committee Tuesday for a hearing on his nomination by President Joe Biden for another four-year term. Powell, a Republican, won the favor of Biden and some other Democrats for his emphasis on the importance of the Federal Reserve achieving maximum employment that is broad-based and inclusive.
Data to be released on Wednesday will likely show consumer prices rose 7% in December from a year earlier, according to the median forecast of economists surveyed by Bloomberg. That would exceed the 6.8% annual increase in November and would be the largest increase since 1982.
Here are some of the points about inflation and the Federal Reserve made by several well-known economists on panels at the AEA conference:
Furman, a professor at Harvard University, said he expects inflation to remain high this year, with an average forecast of 3.2% for the price index of consumer staples. That’s above the 2.7% median forecast of Fed policymakers at their December 14-15 meeting.
Meanwhile, Furman saw a 15% chance that inflation will be higher this year than it was last year. He also claimed that the three candidates that Biden is reportedly considering for the central bank board “are considerably more moderate than any who have been at the Federal Reserve” for a long time.
Taylor, whose monetary policy rule has been a guide for central banks around the world for years, said the Fed is “way behind” the curve. Depending on the assumptions made, he suggested that the federal funds rate should be between 3% and 6%, not the level near zero percent that the central bank is now targeting.
Noting that Treasury yields rose last week, the Stanford University professor predicted to see “more of that in the future.”
Summers, a Harvard University professor and paid Bloomberg contributor, also expects Treasury yields to rise further.
“As the reality of the need to balance supply and demand becomes clear, interest rates will increase substantially over the next year and a half,” he said.
Summers got into a lively discussion with Stiglitz at the conference, arguing that the Columbia University professor was putting too much emphasis on supply chain problems because of rising prices.
Gregory Mankiw, who was chief White House economist for Republican President George W. Bush, said “much” of the rise in inflation could be attributed to temporary supply dislocations. “We also have a very tight labor market and it is starting to show in the growth of wages,” he said.
The Harvard professor, who now describes himself as an independent politician due to opposition to former President Donald Trump, said that while inflation will not remain at 7%, he would be “surprised” if it falls back to 2%. very quickly.
Former Fed Vice Chairman Alan Blinder said he still considers himself a member of the “Transitional Team” in the inflation debate.
But Blinder, who served in the White House under Clinton and now teaches at Princeton University, has said it could take some time for “bottleneck inflation” to abate. Fed policymakers have been slow to recognize bubbling price pressures in their forecasts, he added.
The soft landing that Powell and his colleagues at the central bank are trying to engineer for the economy “will require the Fed to be both lucky and smart,” Hubbard told the conference.
Pointing to inflationary pressures from rising rents and home prices and rising wages, the Columbia University professor doubted that rate hikes of three-quarters of a percentage point that Fed policymakers have planned for this year are sufficient.
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The Fed joins left and right to warn of the inflation curve in the US.