Fed’s Bullard dismisses concern over a repeat of the inflation fiasco of the late 1970s

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Concerns that the Federal Reserve could be repeating mistakes that led to an inflation explosion in the late 1970s do not take into account that the United States central bank has an inflation target of 2%, the president said Thursday. of the St. Louis Fed, James Bullard. Last week, former Treasury Secretary Larry Summers, who was on President Barack Obama‘s shortlist for Fed chair, recently said that the US central bank faces “inflationary pressures of a kind that we have not seen in a generation “and you’re making a mistake. promising to keep interest rates low.

“The Fed failed in the 1970s. And I think if the Fed doesn’t want to fail, it will have to begin to acknowledge the reality of those challenges, and that will mean a significant change in its tone,” Summers said. The consumer price index rose more than 13% in 1979. Since then, it has been a warning to the central bank. Fed Chairman Paul Volcker raised interest rates by almost 20% to control inflation. When asked for comment, Bullard said that his opinion from the 1970s is that the Fed had little credibility and there was a debate over whether inflation was even the responsibility of the central bank. “That is completely different from the inflation targeting era that began in the 1990s and continues today,” Bullard said. In 2012, the Fed formally adopted a longer-term inflation target of 2%. “So I have a hard time mapping everything that is happening now to what was happening in the 1970s,” said Bullard. Some economists worry that strong growth in money supply aggregates last year and early 2021 could lead to higher inflation. Bullard said the theory that monetary aggregates lead to inflation also assumes that growth will continue. But under the Fed’s 2% inflation target, the central bank is saying it will act in such a way going forward that it will keep inflation under control, the St. Louis Fed chairman noted. In a talk with Georgia State University, Bullard said the top three theories economists use to forecast inflation trends – money growth, higher fiscal deficits, and strong growth – all point to the upside. “No matter which of those three theories is your favorite as to the causes of inflation, all three point to higher inflation in 2021,” he said. But the Fed will be less preemptive in raising rates at the first “puff” of inflationary pressure, Bullard said. Inflation has been running at a 1.6% rate since 2012, so the Fed could miss on the “high side” at half a percent for some time and still hit its average inflation target of 2%, he said. Kansas City Fed President Esther George said Thursday that prices rose and fell, muddying the waters, but said it is difficult to measure average price movements during the pandemic. He said inflation could rise rapidly later this year. As he has been for some time, Bullard was optimistic about the economic outlook for 2021 and said he expected rapid growth in the first quarter and the next few quarters. He said he expected the unemployment rate to fall to 4.5% by the end of the year. Other lesser-known labor market indicators will also improve, he added. Bullard said the recent surge in the TMUBMUSD10Y 10-year Treasury yield, 1,494% “is appropriate” given the improved growth prospects and higher inflation expectations. He noted that the 10-year yield has not reached pre-pandemic levels. When asked if the Fed would start slowing its bond purchases this year, Bullard said it was too early to speculate. “Today I gave an optimistic outlook … but I would definitely like to see if this materializes or not before making any adjustments to policy,” said Bullard. “I just think we will have to see further progress before we start that conversation,” he added. The Fed has said it will continue to buy at least $ 120 billion in bonds and mortgage-backed securities each month until there is “substantial progress” in meeting the goals of a healthy labor market and constant 2% inflation. Fed officials said last month they expect these purchases to continue for “some time.” Market experts have pointed to a reduction in purchases by early 2022. The market sees a pullback in asset purchases as the first sign of a tighter policy. Stocks moved sharply lower on concerns about rising long-term interest rates. The Dow Jones Industrial Average DJIA, -1.48% fell more than 480 points.