Transitory or Permanent Inflation: Is Inflation Here To Stay?

Jerome Powell, Chairman of the US Federal Reserve while recently stating that inflation has significantly increased revealed that it still remains transitory.

In his written testimony for hearing before the House coronavirus committee, he made no mention of when the Federal Reserve (Fed) might hike rates. Nor were the earlier forecasts for liftoff from last week were talked about. However, he did repeat the Federal Reserve’s commitment to supporting the economy until the recovery is complete.

He also warned about the slowing pace of vaccinations and pointed to new strains of the virus as a potential economic risk.

The congressional hearing will also focus on the Fed’s emergency lending facilities during the pandemic. According to Powell, the Federal reserve’s actions unlocked $2 trillion of funding for businesses, non-profits, and state and local governments. Ultimately he argued that that prevented businesses from closing and workers from losing their jobs. Overall he said that the economy and the labor market are strengthening even if the pace of recovery is uneven.

According to some analysts, inflation was potentially a much more severe problem than the federal reserve has been admitting to. The Fed is partially right that a lot of recent move in inflation is from supply shocks. The fact that people cannot get certain goods and services has led to a big increase in prices. But, on the other hand, what leads to permanent inflation is when there is a lot of added demand and a lot of spending going on. The is with potential increased spending from the Biden administration’s push on infrastructure. Economists also believe that things are turning out to be stronger than the Federal Reserve expected on the spending front. This is what is creating a problem for the Federal Reserve.

The sooner the Federal Reserve can express the fact that they will do what it takes to keep inflation from spinning out of control, the better it would be. It is good to have inflation a little bit higher because they’ve been undershooting the 2% target for a while. However, the real issue is that if things start to turn out to be more permanent than they actually have been talking about then they’ll have to move quickly. Additionally, they will have to tell the markets now about their future move so that there is no adverse effect. This actually means that they’ll be less likely to be behind the curve and have to raise interest rates by less. This would actually be something positive for the markets.

Can the Fed ever raise interest rates with a massive level of the private sector and public sector debt that is out there right now?

If the Fed waits too long then they have to raise rates even more to get the credibility and that’s the real danger. There’s plenty of room to raise rates if inflation actually starts to be permanently higher or at a level the Fed isn’t happy about. However, the Fed will have to make sure that they communicate and that is what keeps the rates from rising by too much.

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