Fed governor plays down inflation risks as ‘transitory surge’

A senior Federal Reserve official has called on the US central bank to be “patient” in pursuing its ultra-loose monetary policy, dismissing inflation worries and highlighting “uneven” improvements in the labour market.

The comments by Lael Brainard, a Fed governor, suggest the US central bank is not ready to begin contemplating removing its support for the pandemic-hit US economy, even as growth picks up and consumer prices begin to rise.

They also indicate that senior Fed officials viewed last week’s weak jobs report for April as reinforcing their concerns that the acceleration in the US recovery this year remains uneven and fraught with uncertainty.

“The outlook is bright, but risks remain, and we are far from our goals. The latest employment report reminds us that realised outcomes can diverge from forward projections and underscores the value of patience,” Brainard said.

“Remaining patient through the transitory surge [in inflation] associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals . . . is not curtailed by a premature tightening of financial conditions.”

The monetary policymaker’s comments come against the backdrop of higher energy prices and mounting evidence of supply-chain bottlenecks as economies globally begin to emerge from coronavirus-related lockdowns.

Investors have grown increasingly worried that the rise in consumer prices this year may be more pronounced than is at present expected, leading to more sustained inflation that may prompt the Fed to tighten monetary policy sooner than indicated by officials in their projections.

Brainard sought to quell those fears on Tuesday, highlighting that production-related issues would smooth out over time and that “supply-demand imbalances” in the in-person services sector would also be resolved within “a few quarters” as the vaccination campaign progressed and the economic reopening continued apace.

“To the extent that supply-chain congestion and other reopening frictions are transitory, they are unlikely to generate persistently higher inflation on their own,” she said. “A persistent material increase in inflation would require not just that wages or prices increase for a period after reopening, but also a broad expectation that they will continue to increase at a persistently higher pace.”

The April jobs report, which showed the US economy adding 266,000 positions last month, sharply lower than its pace of 770,000 jobs in March, was far weaker than projected by most economists.

“[The data] reminds us that while there are good reasons to expect the number of jobs and the number of people wanting to work will make a full recovery, it is unlikely they will recover at the same pace,” she said.

While some economists, business groups and Republican lawmakers pointed to enduring federal unemployment benefits as a key reason why the demand for labour appeared to be outpacing the supply of labour from workers, Brainard pointed to “virus-related impediments” as the main reason why businesses were facing challenges hiring people.

She said these included health and safety concerns, gaps in childcare and public transport weaknesses.

“There is good reason to expect a strong rebound in employment over coming quarters, although the different forces affecting demand and supply may lead to uneven rates of progress,” said Brainard, a former Obama administration official and a Democrat. “But today, by any measure, employment remains far from our goals.”