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Inflation could leap to its target much faster than expected as widespread vaccination revitalizes the US economy, Esther George, president of the Federal Reserve Bank of Kansas City, said Tuesday.
US price growth has failed to hold steady at its 2% target for years, and the coronavirus pandemic saw inflation nosedive as economic activity froze. Federal Reserve policymakers have since adjusted their policy framework to pursue above-2% inflation for a brief period of time to counteract the current bout of weak price growth.
Yet some economists have wondered whether the new inflation objective will be any more achievable than the previous target.
George said Tuesday that some struggling sectors — including the travel and hospitality industries — placed an outsized drag on inflation in recent months. A swift economic reopening could see those businesses rapidly bounce back and drive inflation higher, she added.
“Price inflation for many other categories of consumption (particularly goods) has moved up, sometimes quite sharply,” George said in remarks for delivery at Central Exchange in Kansas City. “Such a scenario does not suggest higher inflation is a near-term threat, but rather that inflation could approach the Committee’s average inflation objective more quickly than some might expect.”
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The Fed’s updated inflation target joins maximum employment as the two criteria necessary for the central bank to lift interest rates. Fed policymakers said last month they expect the benchmark interest rate to stay near zero for at least two more years, adding it would need to see “substantial further progress” toward reaching its inflation and employment goals to consider tightening monetary conditions.
While George strayed from providing her own timeline for expected inflation, Atlanta Fed President Raphael Bostic said Monday that it might be possible for the central bank to raise rates as soon as mid-2022. The optimistic projection backs up George’s assertion that price growth could accelerate sooner than Fed officials previously forecasted.
“I do think there is some possibility that the economy could come back a bit stronger than some are expecting,” Bostic said in a virtual conference with the Rotary Club of Atlanta.
He continued: “A whole lot would have to happen to get us there.”
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Source:: Business Insider