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Concerns that the Federal Reserve could be repeating mistakes that led to an explosion of inflation in the late 1970s don’t take into account that the U.S. central bank has a 2% inflation target, St. Louis Fed President James Bullard said Thursday.
Last week, former Treasury Secretary Larry Summers, who was on President Barack Obama’s short list to be Fed Chairman, recently said the U.S. central bank is facing “inflationary pressures of a kind we have not seen in a generation” and is making a mistake for promising to keep interest rates low.
“The Fed failed in the 1970s. And I think if the Fed wants not to fail, they are going to have to start recognizing the reality of those challenges and that is going to mean a significant change in their tone,” Summers said.
The consumer price index rose over 13% in 1979. It has been a cautionary tale for the central bank ever since. Fed Chairman Paul Volcker pushed interest rates almost up to 20% to bring inflation under control.
Asked for comment, Bullard said that his view of the 1970s is that the Fed had little credibility and there was a debate over whether inflation was even the central bank’s responsibility.
“That’s completely different from the inflation-targeting era that began in the 1990s and continues today,” Bullard said.
In 2012, the Fed formally adopted a 2% longer-run inflation target.
“So I have a hard time mapping anything that’s going on now back to what was happening in the 1970s,” Bullard said.
Some economists are concerned that strong growth in money supply aggregates last year and early in 2021 could lead to higher inflation.
Bullard said the theory that money aggregates lead to inflation also assumes such growth will continue. But under the Fed’s 2% inflation target, the central bank is saying that it is going to act in such a way in the future that will keep inflation under control, the St. Louis Fed president noted.
In a talk to Georgia State University, Bullard said that all three leading theories economists use to forecast inflation trends — money growth, higher fiscal deficits and strong growth — are pointing higher.
“No matter which of those three theories is your favorite as far as causes of inflation, all three are pointing to higher inflation in 2021,” he said.
But the Fed will be less preemptive to hike rates at the first “whiff” of inflation pressure, Bullard said.
Inflation has been running at a 1.6% rate since 2012 so the Fed could miss on the “high side” by a half-a-percent for some time and still achieve its 2% average inflation target, he said.
Kansas City Fed President Esther George said earlier Thursday prices are moving higher and lower, muddying the waters, but said it is hard to gauge average price moves during the pandemic. She said inflation could move rapidly higher later this year.
As he has been for some time, Bullard was upbeat about the economic outlook for 2021, saying he expected rapid growth in the first quarter and quarters ahead. He said he expected the unemployment rate to fall to 4.5% by the end of the year. Other less-well-known labor market indicators will also improve, he added.
Bullard said the recent rise in the 10-year Treasury yield TMUBMUSD10Y, 1.486% “is appropriate” given the improving growth outlook and rising inflation expectations. He noted that the 10-year yield has not reached its pre-pandemic levels.
Asked if the Fed would begin to slow down its bond-buying purchases this year, Bullard said it was too soon the speculate.
“I gave a rosy outlook today… but I would definitely want to see whether this materializes or not before getting into any adjustments to policy,” Bullard said.
“I just think we’re going to have to see the further progress before we even start that conversation,” he added.
The Fed has said it will continue to purchase at least $120 billion of bonds and mortgage-backed securities each month until there has been “substantial progress” in meeting is goals of a healthy labor market and steady 2% inflation.
Fed officials said last month that they expect these purchases to continue for “some time.” Market experts have penciled in a tapering of the purchases for early 2022. A retreat on asset purchases is seen by the market as the first sign of tighter policy.
Stocks moved sharply lower on concern about rising long-term interest rates. The Dow Jones Industrial Average DJIA, -1.19% was down over 480 points.
