MNI INTERVIEW: Fed's Gruber Sees 'Messy' Inflation Outlook

It will take some time before the Federal Reserve has enough clarity on the inflation outlook to be confident a pickup in the rate of price rises is temporary, even if a shift toward more persistent price rises appears unlikely for now, Kansas City Fed Research Director Joseph Gruber told MNI.

"I'm not sure what signal to take right now. The inflation picture is very messy," he said in an interview. "There's so much uncertainty in the overall economy right now, it would be premature to expect the inflation picture to become clearer much sooner."

Gruber said he expects a temporary increase in inflation related to supply constraints and annual comparisons to the depths of the pandemic.

"It's unclear that that's going to feed through to basically a more persistent increase in inflation at this point," Gruber said. "It's not clear that we're moving to a different regime."

His comments are in line with the central bank message that it is nowhere near considering any removal of monetary stimulus, including its monthly USD120 billion in purchases of Treasury and mortgage bonds.

Still, the views are more hawkish than the core of the Federal Open Market Committee, which tends to dismiss inflation risks more categorically -- in line with Kansas City Fed tradition and the views of its current president, Esther George.

Gruber said the increase in market-based inflation expectations seems mostly benign, reflecting improved growth expectations. Still, he noted a subtle shift in market sentiment.

"A lot of that reflects not necessarily higher expectations for inflation but inflation risk -- it's just become sort of embodied at this point that inflation could move up," he said.

There is a growing debate among former and current Fed researchers about the possible inflationary risks stemming from several rounds of fiscal relief coupled with a faster rollout of vaccinations.

Gruber said he is optimistic growth will ramp up in the second half of the year as Covid fears recede and as the effects of combined fiscal and monetary stimulus are felt through the economy.

SAVINGS, PARTICIPATION KEY TO RECOVERY

Still, he said it is unclear whether the pent-up savings racked up during the pandemic by U.S. consumers, particularly wealthy ones, will all be spent. That may be especially true after a historic shock that shut down the global economy in ways previously not seen plausible, Gruber said.

"It's likely that consumers are going to want be a little bit more liquid," he said.

At the same time, Gruber said one key factor holding back the economic recovery, the sharp decline in labor force participation that followed the pandemic hit, may be set to reverse fairly rapidly soon.

"With vaccination, as we get back to a more normal childcare situation, that could probably lead to a big uptick in labor force participation," Gruber said.

The Fed has said it needs to see "substantial further progress" toward its full employment and stable prices goals before reducing the pace of its bond purchases, and made clear that they are focused on broad measures of progress on the labor market.

The economy is still 8.4 million jobs short of its pre-pandemic levels and the official unemployment rate of 6% masks the sharp retreat in participation.