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MNI (Ottawa)
CHICAGO (MNI)

Chicago Federal Reserve research director Anna Paulson told an MNI webcast Wednesday the job market appears far from policy makers' goal of an inclusive recovery and the big inflation risk is likely sustaining price gains at an annual rate above 2% after pandemic supply chain holdups unwind.

Recent job reports have been "a little disappointing," there are still seven million people sidelined by the pandemic and "the virus is still really in charge here," she said.

"The labor market is far from the FOMC's inclusive employment mandate," and "there's still a lot of labor market healing to come," Paulson said. Wages are returning to historical trends while lagging inflation rather than driving further price gains, she said.

The outlook for strong GDP growth around 6% this year remains and Paulson suggested things are firm enough to consistently shrink the Fed's USD120 billion monthly bond purchases. "Taper is about kind of easing up on the gas pedal a little bit, the gas pedal is pretty firmly planted on the floor right now" she said. "There would have to be a pretty dramatic change in the outlook for something like that to change."

DIFFERENT RATE HIKE CONDITIONS

"The conditions for interest-rate increases are very different than the conditions for tapering," Paulson added. Her outlook is in line with Fed's latest dot plot projections, which she noted added in several rate hikes over the forecast horizon.

The current burst of inflation still appears to be driven by forces specific to the pandemic that are likely to fade, she said. The bigger question may be long-term forces that held inflation below 2% around much of the world in the 15 years before the pandemic, Paulson said.

"You want to be able to have inflation settle in somewhere moderately above 2 for some time," she said. "You want to go into the next recession with this nice cushion."

Inflation expectations as measured by market indicators and economist surveys have climbed but appear in line with the Fed's goals, reflecting investors who are "keenly aware" of past struggles to bring inflation up to target, she said.

The unexpected length of supply chain disruptions has pushed some expected growth for this year into next year, she said.

MNI Ottawa Bureau | +1 613-314-9647 | greg.quinn@marketnews.com
MNI Ottawa Bureau | +1 613-314-9647 | greg.quinn@marketnews.com