MNI INTERVIEW: Fed To Closely Gauge Inflation Views - Schoenle
MNI (WASHINGTON) - The Federal Reserve has time to assess how consumers' inflation expectations evolve in the coming months, but there is a chance the Covid inflation surge will make American views more sensitive to further price increases, the former deputy director of the Cleveland Fed's Center for Inflation Research, Raphael Schoenle, told MNI.
"We have seen inflation again recently, and for a lot of people it's a very recent experience that they they can easily recall," he said. "They have a new memory -- and a set of experiences -- that we can bring back to mind and it is going to affect how we see the future because we've just seen it."
With inflation already above the 2% target and a recent surge in inflation fresh in peoples' memories, there is concern that expectations of inflation could jump higher, but the central bank still has time to gauge incoming data before making any policy decisions, he said.
"My take on the medium term is we just need to get a few more months' data points and then go from there," he said. "We still don't know about the tariff's magnitude, duration, none of that. There's so many dimensions."
Even though one data point can trigger adjustments in beliefs, policymakers would really want to be very careful and get the best signal, Schoenle said. "Look at the uncertainty around it, both in terms of cross section, but also how persistent is the signal that you're getting."
INFLATION EXPERIENCE
A growing number of Americans are beginning to expect that prices will stay high or rise and Fed officials have dialed up focus on keeping inflation expectations anchored. There has been an uptick in near-term inflation expectations, but longer-term inflation expectations have broadly remained stable, FOMC officials have noted. (See: MNI INTERVIEW: Rising Price Expectations Could Prompt Fed Hike)
"I think there is a higher risk in that sense that you can all of a sudden jump to a higher inflation belief environment again," Schoenle said. On the other hand, Americans have seen that the Fed has brought down inflation considerably, he noted, which should provide some relief. "I think it can go either way, but I think we're not the same people that we were before Covid and the recent inflation experience," he concluded.
EARLY SIGNAL
Inflation expectations have long shown a gap between Republicans and Democrats, with slightly lower projections from the side that controls the White House, but that divergence has grown in the short-term.
Schoenle downplayed that growing split, when conditioned for other factors. "I think we are still in the phase where any of this political stuff is being filtered through. So I think we have to see what the medium term interpretation is."
"There is a lot of noise in the very short-term," said Schoenle, now at Brandeis University, maintaining the value of recent surveys. These surveys "do tend to rise and show inflation before professional forecasters" during inflationary periods.