Transitory Is ‘Dirty Word’ as Inflation Lasts, Fed’s Bostic Says
(Bloomberg) -- Federal Reserve Bank of Atlanta President Raphael Bostic said this year’s inflation surge is lasting longer than policymakers expected, so it’s not appropriate to refer to such price increases as transitory.
“Transitory is a dirty word,” Bostic said in a virtual speech to the Peterson Institute for International Economics on Tuesday. He spoke with a glass jar labeled “transitory” at his side, depositing $1 each time he used the “swear word,” as it’s become known to him and his staff over the past few months.
“It is becoming increasingly clear that the feature of this episode that has animated price pressures — mainly the intense and widespread supply-chain disruptions — will not be brief,” Bostic said. “By this definition, then, the forces are not transitory.”
Bostic, who votes on monetary policy this year, endorsed the Federal Open Market Committee’s plans to taper its $120 billion in monthly asset purchases, which is likely to start at its November meeting. In a Q&A with Peterson President Adam Posen, Bostic said U.S. growth and the recovery in employment have exceeded his expectations.
“I’ve adjusted my ‘dot plot’ submissions to reflect much greater growth, much more in terms of jobs and also higher inflation,” Bostic said, referring to the committee’s quarterly interest rate forecasts. “It’s also called me to pull forward some of my thinking about when interest rate liftoff will be. That’s still more than a year off in my forecasts.”
Tapering is unlikely to slow the economy because markets are functioning well and the issues with the U.S. economy are more about supply-chain disruptions from Covid-19 rather than demand, he said in the Q&A.
Bostic’s concern with inflation was echoed by St. Louis Fed President James Bullard, who said he favors starting to taper in November and finishing by the first quarter of 2022 to give the central bank flexibility to raise rates if necessary.
“The story that inflation will come down naturally is a reasonable one, but I only want to put 50% probability on that scenario,” Bullard said Tuesday in a televised interview with CNBC. “I have got to put some probability on a scenario where inflation stays high or even goes higher.”
In his prepared remarks, Bostic said he was seeing signs of a broadening in inflation.
“I believe evidence is mounting that price pressures have broadened beyond the handful of items most directly connected to supply-chain issues or the reopening of the services sector,” he said.
He said longer-run inflation expectations measures have climbed, with many reaching decade highs.
“These upside risks to the inflation outlook bear watching closely,” Bostic said. “Up to now, indicators do not suggest that long-run inflation expectations are dangerously untethered. But the episodic pressures could grind on long enough to unanchor expectations. We will be watching carefully.”
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