January 28, 2023

Inflation Rate Climb Adds Impetus to Fed Policy Shift

WASHINGTON—The recent inflation surge gives Federal Reserve officials further reason to begin discussing an eventual wind-down of their pandemic-driven easy-money policies at their meeting next week.

A growing number of economists are becoming concerned that the Fed could fall behind the curve on inflation as it seeks to aid the labor market’s recovery. If that happened, the central bank would have to tighten policy more abruptly than economists and market participants currently anticipate, dealing a potential blow to the economy and fueling market volatility.

“The intensity of the current inflation and the current bottlenecks in supply chains and labor markets is greater than I had anticipated,” said former Fed Vice Chairman Donald Kohn, adding that he still shares the central bank’s belief that the inflation pickup is temporary. “But it also could be that the underlying demand-supply balance will not correct as readily or as comfortably as the Fed and I had expected earlier. It’s got my inflation antenna quivering.”

The first step in what is expected to be a gradual process of scaling back easy money would be to slow Fed purchases of mortgage and government bonds, something Fed Chairman Jerome Powell has said he’s not in a hurry to do.

Consumer prices rose 5% in May from a year earlier, the Labor Department said Thursday. So-called core prices, which exclude volatile food and energy components, rose 3.8%, the largest annual jump since 1992. That followed strong price increases in April as well. The Fed seeks 2% inflation over the medium term, though it uses a different index as a gauge.

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