(Bloomberg) — The Federal Reserve has been able to do something we rarely see in the United States these days: get members of the Democratic and Republican parties to agree.
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At this year’s annual meeting of the American Economic Association, leading economists on both sides of the political spectrum argued that the Federal Reserve was behind the curve in the battle to contain the inflation boom in an economy still reeling from the pandemic.
While they generally welcomed the Fed’s pivot toward a tighter monetary stance and expected an easing of price pressures this year, they sounded skeptical that inflation would slow as much as central bankers expected. They saw it as still well above the monetary policy makers’ target of 2%.
Among the participants in the three-day virtual conference, which ends on Sunday: former Treasury Secretary Lawrence Summers, former White House chief economist Jason Furman — both Democrats — and prominent monetary economist John Taylor and former Chairman of the Council of Economic Advisers Glenn Hubbard, who has served in Republican administrations.
To be sure, not all economists — especially some on the left — are sounding the alarm about the threat of inflation and the Fed’s delayed response to it.
Nobel laureate Joseph Stiglitz, who was chief economist in the White House of Democratic President Bill Clinton, called on the central bank to be vigilant. He said higher interest rates would not solve the global supply and shortage problem that helped drive up inflation. Additionally, workforce participation remains much lower than it could be.
Federal Reserve Chairman Jerome Powell will likely be pressed on what he intends to do to stem inflation when he appears on Tuesday before the Senate Banking Committee for a hearing on his nomination by President Joe Biden for another four-year term. Powell, a Republican, won the endorsement of Biden and some other Democrats for his emphasis on the importance of the Federal Reserve’s maximizing broad and inclusive hiring.
Data due on Wednesday will likely show consumer prices rose 7% in December from a year earlier, according to the median forecast of economists polled by Bloomberg. That would exceed the 6.8% annual rise in November and would be the largest increase since 1982.
Here are some of the points regarding inflation and the Federal Reserve made by a number of famous economists on committees at the AEA conference:
Fuhrman, the Harvard professor, said he expects inflation to remain high this year, with an average forecast of 3.2% for the core PCE price index. That’s higher than the 2.7% average Fed policy makers had expected at their December 14-15 meeting.
Meanwhile, Foreman saw a 15% chance that inflation will rise this year from last year. He also emphasized that the three candidates Biden is said to be considering on the Fed’s board are “more pessimistic than anyone who’s been a Fed member” for a long time.
Taylor, whose monetary policy rules have served as a guide to central banks around the world for years, said the Fed is “much behind” on the curve. Based on the assumptions made, he proposed that the fed funds rate be anywhere from 3% to 6%, not the near-zero level that the central bank is now targeting.
Noting that Treasury yields jumped last week, the Stanford professor expected to see “more of that to come.”
Summers, a Harvard professor and a paid contributor to Bloomberg, expects Treasury yields to rise further.
“As the reality of the need to balance supply and demand becomes clear, interest rates will rise significantly over the next year and a half,” he said.
Summers entered into a lively contrast with Stiglitz at the conference, arguing that the Columbia professor was focusing too much on supply chain disruptions due to rising prices.
Gregory Mankiw, chief economist at the White House for Republican President George W. Bush, said “a lot” of the increase in inflation can be attributed to temporary disruptions in supply. “We also have a very tight labor market and you’re starting to see wages grow,” he said.
The Harvard professor, who now describes himself as politically independent due to opposition to former President Donald Trump, said that although inflation would not stay at 7%, he would “be surprised” if it fell to 2% too fast.
Former Federal Reserve Vice Chairman Alan Blinder said he still considers himself a “Team Transitory” member of the inflation debate.
But Blinder, who served in the Clinton White House and now teaches at Princeton University, said it could take some time to ease the “bottleneck inflation”. He added that Fed policy makers have been slow to recognize escalating price pressures in their forecasts.
Hubbard said at the conference that the soft landing that Powell and his Fed colleagues are trying to engineer for the economy “will require the Fed to be lucky and smart.”
Pointing to inflationary pressures from rising rents, housing prices and increasing wages, the Columbia University professor questioned whether the three quarter-percentage point rate increases set by federal policymakers for this year would be enough.
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