The views of Fed policy makers are divided on the prospects for handling inflation in the United States (US) in the long term. There are two opposing views whether high inflation will be a recurring problem in the future that requires repeated interest rate hikes as well.
Separate statements by Fed Chair Lael Brainard and Fed President Richmond Thomas Barkin on the post-pandemic outlook show differing views even though at this time all saw the need for an aggressive rate hike this year.
Differences in views that can divert the direction of the Fed's policy path for the following years.
Brainard in an interview with the Wall Street Journal said, the most important task of the Fed at this time is to bring inflation back to its target of 2%. He believes a series of rate hikes and a massive reduction in bond holdings will achieve that.
He said it was driven by core inflation, excluding energy and food, starting to moderate. That happened even in the midst of major price hikes that hit their highest level since 1981. As quoted by Reuters, Wednesday (13/4), Brainard predicts that demand and inflation will cool in the coming months as the Fed quickly raises interest rates.
However, once the economy moves beyond the price pressures caused by supply restrictions due to the Covid-19 pandemic and the Russo-Ukrainian war, he sees, the economic picture will be reset to near normal before the pandemic.
Low inflation, during the two decades before the pandemic, posed a greater threat than high inflation.
Continued downward pressure on prices from an aging population, slow growth and globalization forced the Fed to keep interest rates low at the time. Seeing that experience, some critics considered the Fed's response to be too slow to high inflation this time.
Separately, Richmond Barkin signaled he agreed with Brainard's views on the near-term policy path. However, his views regarding the post-pandemic inflation outlook are very different.
He said rising price pressures could persist if companies remade supply chains more resilient to potential disruptions, but also cost more, and governments spend benefits on aging populations or on defense.
Labor constraints from slowing population growth may also add to this pressure. If bouts of high inflation become more common in the future than they were before the pandemic, Barkin continued, efforts to stabilize inflation expectations could require a period in which we tighten monetary policy more than the recent pattern.
However, he stressed, the task of the Fed in the short term is clearly raising interest rates quickly to a neutral level that is expected to be around 2.4%.
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