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Fed's Waller Says Inflation Jump Likely Temporary — Update

By Paul Kiernan 

WASHINGTON -- The U.S. economy is "going gangbusters," but the Federal Reserve needs to see several more months of data on jobs and inflation before determining when to begin scaling back its easy-money policies, a central banker said.

Over the past week, official data have shown April job creation falling far short of economists' forecasts, evidence of a shortage of available workers, and consumer prices rising much faster than expected, Fed governor Christopher Waller said Thursday. But he called for central bankers to remain patient.

"The May and June jobs report may reveal that April was an outlier, but we need to see that first before we start thinking about adjusting our policy stance," Mr. Waller said in a speech. "We also need to see if the unusually high price pressures we saw in the April CPI [consumer-price index] report will persist in the months ahead."

Since last year, the Fed has held interest rates near zero and purchased $120 billion of bonds each month to support the economy's recovery from the pandemic-induced recession. Most Fed officials said in March that they expected to leave rates on hold through 2023. Policy makers plan to continue the current rate of bond purchases until the economy makes "substantial further progress."

Data released Wednesday showed the consumer-price index surged 4.2% in April from a year earlier, prompting market participants to bet that the Fed will start raising rates sooner than officials expect.

Fed officials say the increase in inflation was likely driven by temporary factors related to the pandemic, including massive fiscal stimulus, supply-chain bottlenecks and a surge in demand as the economy reopens. So-called calendar effects also played a role as low inflation in April 2020, when much of the economy was shut down, dropped out of the 12-month price measure.

Similarly, Mr. Waller said, last week's lukewarm jobs report reflects a temporary shortage of workers rather than a slowdown in the labor market. Fear of Covid-19, enhanced unemployment benefits, child-care issues and early retirements have caused some people to remain out of the labor force even as employers' demand for workers has surged.

Those problems should ease, Mr. Waller said, as schools and daycare providers reopen and pandemic unemployment programs expire.

"The economy is ripping, it is going gangbusters," he said.

The critical question for inflation is how long it will run hot. Mr. Waller said he expects prices are likely to rise between 2.25% and 2.5% a year for the next two years, a scenario that would be consistent with the Fed's target.

"The takeaway is that we need to see several more months of data before we get a clear picture of whether we have made substantial progress towards our dual-mandate goals," Mr. Waller said, referring to the Fed's objectives of full employment and sustained 2% inflation.

Most Fed officials have resisted clearly defining the level of inflation that would push them toward tightening monetary policy in the absence of a fully recovered labor market.

Mr. Waller, however, laid down a personal marker.

"For me, if I were to see 4% inflation month in, month out, month in, month out, I would get very concerned," he said.

Write to Paul Kiernan at paul.kiernan@wsj.com

 

(END) Dow Jones Newswires

May 13, 2021 16:53 ET (20:53 GMT)

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