MNI: Fed's Bostic Sees Risk of Un-Anchored Inflation

Atlanta Federal Reserve President Raphael Bostic on Tuesday pointed to risks that the current episode of rapid inflation will turn into a more dangerous period where price expectations become untethered, and conditions are right for the FOMC to start scaling back bond purchases.

"Pervasive supply chain issues will probably last longer than most of us initially expected," Bostic said in prepared remarks to the Peterson Institute of International Economics. "Up to now, indicators do not suggest that long-run inflation expectations are dangerously untethered. But the episodic pressures could grind on long enough to un-anchor expectations."

The "salient" upside risks keeping CPI above 2% for some time "argue for a removal of the Committee's emergency monetary policy stance, starting with the reduction of monthly asset purchases," Bostic said.

The word "transitory" when describing inflation has become a problem because its meaning to the public differs from economists who use that word to mean a pressure that will fade along with an episode like the pandemic, Bostic said, joking he was putting the term in a swear jar.

With three-quarters of the CPI basket showing price gains faster than 2% it's clear inflation is more entrenched, he said, adding that he would be comfortable with an overshoot of 2.25% for a period lasting even six years, so long as something bigger isn't coming along.

"The real danger, is that the longer the supply bottlenecks and attendant price pressures last, the more likely they will shape the expectations of consumers and businesspeople, shifting their views on pricing and wages in particular," Bostic said.

"Many firms are already reacting to supply chain challenges in a more structural way. Rather than just waiting out the current supply and production problems, many executives are seeking new or redundant suppliers, changing their inventory systems from "just in time" to "just in case," and taking other steps to insulate themselves from future disruptions of this magnitude," he said.

The Atlanta Fed chief late last month said he sees the central bank lifting rates off near-zero in late 2022 and sees three additional interest rate hikes in 2023.