Tom Barkin, President of the Richmond Fed, said in a newspaper interview that he expects “short-term price volatility,” but says he focuses on medium-term inflation expectations. On that horizon, there are deflationary risks as well as inflationary risks, he says.
The stimulus and pent-up demand once vaccinations free people to spend will perhaps produce a spike in prices, but disinflationary forces like globalization and technology would subdue increases.
Philadelphia Fed Chief Patrick Harker is also sanguine about inflation prospects. He sees price increases in some sectors, but sees the overall picture as still subdued, in an economy that is “pretty choppy.”
Moreover, he emphasized in a television interview, “we’re clearly committed…to exceed 2% for a period of time, but it has to be sustainably above 2% for a period of time.”
ECB Tightening Ahead; Fed Focus Remains Maximum Employment
On the other side of the Atlantic, however, one hawk on the governing council of the European Central Bank says he expects a surge in in Europe that could force the ECB to tighten monetary policy.
Jens Weidmann, president of Germany’s Bundesbank, says the in Germany could exceed 3% by the end of this year, though that will probably prove to be temporary. But inflation will not stay at the same low rate as this year, he said in a German newspaper interview, and a rising rate would force policymakers to talk about a change in monetary policy.
Unlike the Fed, the ECB has price stability as its principal mandate and views 2% inflation as a ceiling, not a level to be achieved on average over time.
“We have been stuck for a long time in a low-inflation phase and so low interest rates, but I am convinced this cannot continue indefinitely,” Weidmann said last week.
“All the more important for the ECB council to take back its expansive monetary policy as soon as it is foreseeable that we will reach our inflation goal.”
The Fed, meanwhile, is also mandated to strive for maximum and to safeguard financial stability.
Fed Chair Jerome Powell said last week that the U.S. is a “long way” from getting back to a labor market that provides social and economic benefits, narrows economic disparities, and heals the damage from recessions.
“Fully realizing the benefits of a strong labor market will take continued support from both near-term policy and longer-run investments,” he said in a webcast for the Economic Club of New York, “so that all those seeking jobs have the skills and opportunities that will enable them to contribute to, and share in, the benefits of prosperity.”
Maximum employment, Powell said, “is a broad and inclusive goal.” In practice this means looking not only at the overall labor market, but at various shortfalls in employment, especially among low and moderate-income workers.
However, fine-tuning monetary policy to address inequities in income, often reflecting racial equity issues, is harder than it looks. A recent study from the New York Fed shows that accommodative monetary policy to support low-income workers can boomerang because it also fuels increases in asset prices, which disproportionately benefit those with more assets.
Easy money has largely the same impact on employment, the study says. “The black unemployment rate falls by about 0.2 percentage points more than the white unemployment rate after an unexpected 100bp monetary policy shock.” The result: “Employment and income gains of black households are small compared to the wealth gains of white households.”
The policymaking Federal Open Market Committee is likely to get some more input on these issues as President Joseph Biden reportedly is weighing two black labor economists to fill the empty seat on the Fed board of governors.
Lisa Cook, an economics professor at Michigan State University, would become the first black woman on the board. Her writings have focused on labor market conditions and the cost of racial discrimination in the job market rather than on inflation.
Cook was an economist at the Council of Economic Advisers in the Obama administration, and served on Biden’s transition team. Also reportedly under consideration is William Spriggs, an economist at Howard University who is chief economist for the AFL-CIO labor union confederation.