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MNI: Quarles Warns 'Significant Upside Risk' for US Inflation

(MNI)

Fed Governor says high inflation next year could put dual mandate goals into conflict.

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Federal Reserve Governor Randy Quarles said Wednesday he sees "significant upside risks" to inflation that could force tighter monetary policy even if the labor market falls short of a complete recovery.

"My focus is beginning to turn more fully from the rapidly improving labor market to whether inflation begins its descent toward levels that are more consistent with our price-stability mandate," he said in remarks prepared for a Milken Institution conference in Los Angeles. "If inflation does remain more than moderately above 2%, be assured that the FOMC has the framework and the tools to address it."

The FOMC has pledged to keep rates near zero "until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2 percent for some time."

The Fed has been "very patient and focused on the need for the labor market to recover as quickly as practicable from the severe damage experienced during the darkest days of the COVID event," he said, but "the escalation in inflation this year is testing the monetary policy framework."

GOALS IN CONFLICT

Most forecasters and FOMC members expect inflation to cool next year, but supply constraints already have become more widespread and more longer lasting than anticipated. Firms faced with a shortage of workers are raising wages, which will put further pressure on prices, and Congress is contemplating additional trillion-dollar spending bills.

"If those dynamics should lead this 'transitory' inflation to continue too long, it could affect the planning of households and businesses and un-anchor their inflation expectations. This could spark a wage-price spiral that would not settle down even when the logistical bottlenecks and supply chain kinks have eased," Quarles said.

He is "quite wary of further increases in inflation expectations in this environment," he added.


Faced with high inflation and less-than-maximum employment, the Fed "takes into account the employment shortfalls and inflation deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate," he said.

"There is evidence in the past couple of months that a broader range of prices are beginning to increase at moderate rates, and I am closely watching those developments," he said.