MNI INTERVIEW: Fed Seen Aiding Healthy Wage Inflation

Continued Fed stimulus is needed to underpin the job recovery with wage inflation that entices more workers into industries that are growing through the pandemic, Jackson Hole presenter Veronica Guerrieri told MNI.

"Tolerating a little higher level of inflation has some advantages in this context, because increasing inflation may come with a change in relative prices that may help to smooth labor differences across sectors," said Guerrieri, a consultant at the Chicago Fed since 2014.

Guerrieri presented a paper at the Jackson Hole conference just after Chair Jerome Powell's speech and expects the FOMC to remain expansionary. "Powell didn't seem too worried about inflation at Jackson Hole and that is consistent with our paper and our message," she said. Her talk on "Monetary Policy in Times of Structural Reallocation" was based on research with coauthors Guido Lorenzoni, Ludwig Straub, and Ivan Werning.

"Powell's strategy will be more cautious in combatting inflation, which will be more appropriate considering the nature of the shock is not symmetric," said Guerrieri, who also teaches economics at the University of Chicago. In other words, given that signs point to inflation being transitory, it appears worth the risk to favor a more expansionary monetary policy to facilitate the labor reallocation process among sectors by supporting the adjustments of relative wages, she said.

HAZY INFLATION GOAL

While Powell's speech suggested he agrees with colleagues who call for a scaling back of bond buying later this year, he provided a dovish tone over the medium-term with comments that didn't go as far as some governors and regional Fed presidents who are already laying out detailed timeframes for a rate hike. The Fed chair has also consistently said most of the inflation surge is temporary, and that the labor recovery remains short of "substantial further progress" required for tapering.

The need for stimulus is accentuated at a time when the Delta variant and the Mu variant that could be vaccine resistant adds new uncertainty in the next few months, she said.

Guerrieri's research didn't specify how far inflation should go and she said central bankers must watch consumer surveys of inflation expectations for signs of a wage-price spiral. (See: MNI: Fed Price Patience May Jolt Expectations Too Far- Ex-Staff)

"It's very hard to say what is the right number for inflation in what may optimally help labor reallocation and it will depend on a combination of factors. We need to see microdata on real wages, we need to see more data on inflation expectations, and that's very important to balance the effects of monetary policy," she said.

HAPPY TO RETRAIN

Guerrieri also pushed back on the notion that the costs of loose Fed policy in propping up zombie firms would outweigh the benefits. "It may be that you actually stimulate too much the sectors or sub-sectors that are not going to have long-lasting demand," she said.

"Given the asymmetric nature of this shock and the fact that we see inflationary pressures in some sectors and not in others, inflation in the booming sectors may actually have reallocation of jobs towards those sectors," she said.

"It's going to generate increases in wages and workers from sectors where unemployment levels are high who are going to be happy to retrain or relocate to these sectors that are rising wages."