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MNI INTERVIEW: Fed Credibility On Inflation Is Key-Sekine (2)


The U.S. central bank may have to act sooner on interest rates than its forward-guidance suggests.

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U.S. Fed monetary policy is in a tough situation on inflation and policymakers may have to act sooner than expected on the price target, former BOJ chief economist Toshitaka Sekine told MNI.

"The Fed has pledged to be behind the curve, so an early rate hike will be interpreted to mean that the Fed broke a promise" and can lose its credibility, Sekine, now a professor at the School of International and Public Policy at Hitotsubashi University, said, warning of a "time Inconsistency" problem.

Also see: MNI INTERVIEW: No BOJ Yen Worry, But Survey Needed-Sekine (1).

Sekine added that monetary authorities face tough situations on all forecasting and need flexibility to act, but in the case of higher U.S. prices, that could mean the central bank ends up "behind, behind the curve."

Still, Sekine said that confidence in the U.S. central bank's views is warranted for now.

"I cannot help trusting in the Fed's insistence and understanding on ...temporary high inflation rates," Sekine said.

But he added that "once the Fed breaks a promise, the bank will not be able to use the same tool, such as policy commitment or forward guidance, for policy rates in the future. The Fed chairman (Jerome Powell) must be worrying about it."

"If consumer prices continue rising, the Fed may have to act. But the average inflation targeting (that the Fed adopted last year) will be inconsistent with early policy action," Sekine said, see: MNI: Shallow Fed Hiking Path Seen Likely, Could Turn Higher.

The Fed maintains its assessment is based on a temporary rise in prices linked to supply-chain issues, wages and the trimmed mean measure of prices will adjust as these factors wane. The Fed debated speeding up tapering asset purchases at its November meeting as policymakers considered how soon it may need to raise interest rates to combat rising inflation, the minutes from the meeting showed.