Fed forecasts strong economic growth, but inflation worries mount | Chicago News


The US Federal Reserve has revised its inflation forecast upwards for this year, forecasting that core inflation – which does not include the cost of food or gas – could soar to 3.4% by the end of the year.

After a two-day political session, Fed chairman Jerome Powell said that while the economy is growing strongly, the pandemic has still reduced 7 million jobs.

Powell also raised concerns that inflation could become a problem in the future.

“The process of reopening the economy is unprecedented, as is the shutdown at the start of the pandemic,” Powell said. “And as the reopening progresses, shifts in demand can be large and rapid, and bottlenecks, hiring difficulties, and other constraints could continue to limit the ability to adjust quickly, increasing the possibility that inflation could be higher and more persistent than we expect.”

Below is a Q&A with Martin Eichenbaum, an economics professor at Northwestern University and co-director of the Center for International Macroeconomics, discussing the latest Federal Reserve forecasts and rising inflation fears.

The Federal Reserve had a two-day monetary policy meeting earlier this week. What expectations do economists like you have before the meeting? What could the Fed announce?

I thought we were going to get a result like what we got. First, I think there was an admission that they were overly optimistic about the prospect of inflation picking up and getting into people’s minds. So if you look at their March 2020 projections and what they think inflation would look like over time, they are significantly more concerned now than they were then. They are more concerned about the possibility that inflation could be high permanently, people will take that into their minds and then a lot of bad things will happen.

In March, the Fed’s inflation forecast for this year would be 2.4%. It now assumes that inflation will rise to 3.4% by the end of the year. How much worry is that?

That’s right, but you need to be careful about it because if you leave out food and gas, they are actually related to core inflation. If you just look at the actual values ​​- like all things considered – it is much higher, closer to 5% according to their forecast.

How would you summarize where the Fed sees the economy right now? What things does Fed Chair Powell feel comfortable doing and what keeps him up at night?

The Fed believes the economy is recovering – and it clearly is. Now the question arises, how fast and how strong. But we all agree that we will recover unless there is some crazy problem with the virus or some variant. The question is, what does full recovery mean in this context? We cut a lot of jobs and the Fed thought we were going to get them all back in terms of employment. What you do find, however, is that many people who have retired from working life simply do not come back. There are a lot of people – I think there are over 2 million. So the question is, if you are shooting at a target, should you be shooting at a target 2 million higher? Or should you think we were wrong, these guys have retired, they’re not coming back. And if we push too hard, we’re not going to get them back, just get a lot of inflation. This is an example of the first-order concern (the Fed) and the technical concern that it offsets. And do you know the answer to that? Devil! Nobody knows.

Fed Chairman Powell said on Wednesday: “We really have no template or experience with such a situation.” It’s a humble admission. How much does the Fed have to offset in responding to changing circumstances?

No two situations are ever the same. This one is much less identical than anything we may have seen in the history of the Fed … Well, completely let it go as they move forward? These are educated guesses that are largely based on theory – theory is a fancy way of carefully thinking – based on facts. And most importantly, it’s data-driven … It’s important that the public understand that this is a process where the Fed interacts with the data and changes its mind when the data changes.

We have lived in a low interest and inflationary economy for so long that many people have never seen what high inflation can do to an economy. When does inflation become a problem? Why can it hurt the economy so badly?

What people need to understand is that you can talk about bond markets and all that stuff that means relatively little to most people, but inflation is a regressive tax. It punishes the poor. It punishes people with a fixed income. Every time inflation rises, it’s like a pay cut. Unless you’re incredibly savvy, your wage increases likely aren’t the same as inflation. So inflation is rising 10% and you may have received a 5% raise – so actually a 5% cut.

Former Treasury Secretary Larry Summers, a Democrat, says he believes politicians are seriously underestimating the dangers of inflation to the economy. Is he right?

I fully understand Larry’s general concern, but I think that meeting said they are paying attention to Larry … enough emphasis on the possibility of inflation going up, and they really need to be careful – and they are.

The Fed believes many of the inflationary pressures are likely to be relatively short-lived, caused by things like the supply chain disruption due to the pandemic and labor shortages in some sectors. Is that your reading too?

My personal thoughts are – other things are the same, and if we weren’t dealing with people – I’d say yes, those supply side shocks, give it a year and it will work by itself. But we’re dealing with real people, and this is what keeps Chairman Powell up all night – what if people don’t know everything and they see inflation go up and they say I need a bigger raise. And then they go to companies and negotiate harder for higher wage increases and the company says my wages just went up. I’m raising prices … so you are seeing this spiral develop and once this spiral develops it’s really hard to stop because you have to hit the economy hard – and nobody wants that scenario. So when that starts to develop, you either jump ahead or you have to go through a bloody recession – which really hurts the poor. Note that poor people get ripped off here if the Fed doesn’t get it right one way or another. When inflation gets out of hand, poor people get screwed. If they have to ruin the economy, poor people get screwed. So the stakes to get it right are really high.

Republicans also argue that overly generous unemployment benefits keep people from returning to work. Do you see this as a major contributor to inflation by driving up labor costs?

Just think of common sense. In some states, if you’re a grocer, you can make more money at home than going to the grocery store, work, and potentially catching COVID. I don’t think you’re a bad person if you stay home and say they pay me to be safe.

The economy has still lost about 7 million jobs compared to pre-pandemic levels, but the Fed expects the economy, as measured by gross domestic product, to grow 7% this year, which would supposedly be the fastest growth rate since 1984. How fast? Would you expect this growth to translate into “full employment” – however you set that brand?

That’s the million dollar question – what is full employment? That said, we believe that everyone who has retired will come back … if you take them out of the mix and say I just gave up on these guys then I think it’s reasonable to do this all in one Year or so, or maybe even faster, we’re back to where we were. On the other hand, if you think wages will have to get this high to lure retirees back, it will take a lot longer. And it is not clear that this is a reasonable expectation.

Is it a problem when people with the funds choose to retire early? Does that harm the economy?

I do not think so. It’s one thing when a 25- or 40-year-old quits his job. Human capital is being destroyed. We are losing their productivity. We may have to support them, etc. It is a terrible human tragedy and bad for the economy. If a 65-year-old decides to retire to play golf and he has the resources to do so, that’s fine.

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