Two Fed officials say 'temporary' US inflation surge may last longer than thought

Atlanta Fed president Raphael Bostic said he now expects interest rates will need to rise in late 2022. PHOTO: NYTIMES

WASHINGTON (REUTERS) - A period of high inflation in the United States may last longer than anticipated, two US Federal Reserve officials said on Wednesday (June 23), prompting one to pull forward his views on when the central bank should start raising interest rates.

Atlanta Fed president Raphael Bostic said with growth surging to an estimated 7 per cent this year and inflation well above the Fed's 2 per cent target, he now expects interest rates will need to rise late next year.

"Given the upside surprise in recent data points I pulled forward my projection," Mr Bostic said, placing him among seven Fed policymakers who at the central bank's meeting last week projected the overnight policy rate may need to lift from the current near zero level some time next year.

That marked a decisive shift from the end of last year, when 12 Fed policymakers felt that crisis levels of interest rates would need to remain in place into 2024.

The difference in the meantime: Vaccines that have driven back the spread of the coronavirus and an economic reopening that has proceeded faster, and driven inflation higher, than Fed officials anticipated.

Both Mr Bostic and Fed governor Michelle Bowman on Wednesday said that while they largely agree recent price increases will prove temporary, they also feel it may take longer than anticipated for them to fade.

"Temporary is going to be a little longer than we expected initially... Rather than it being two to three months it may be six to nine months," Mr Bostic said in an interview on National Public Radio's Morning Edition.

Prices for goods like lumber and used cars have pushed some measures of inflation to multi-year highs, with the consumer price index showing a 5 per cent annualised increase last month, the fastest since 2008.

Though some prices have begun to ease already, the higher prices have registered among elected officials, and forced the Fed to begin thinking about how to ensure prices do not spiral too high or too fast.

Ms Bowman, in remarks to a Cleveland Federal Reserve bank conference, said she agrees prices are being driven by clogged supply chains and surging demand as the economy reopens, factors that should ease.

But she put no timeframe around when that might happen, saying that "it could take some time", and would need to be closely watched as the Fed sets policy.

Fed chair Jerome Powell and other policymakers have staked their current outlook on a presumption that the surge in prices seen as the economy reopened would ease on its own, allowing the Fed to hit its 2 per cent inflation target on average over time.

Mr Powell told a US congressional committee on Tuesday that recent high inflation readings resulted from a "perfect storm" of circumstances related to the reopening, and would abate.

How quickly that happens, however, may influence the Fed's upcoming decisions about when to begin reducing its US$120 billion (S$161.5 billion) in monthly bond purchases, and eventually raise interest rates.

Boston Fed president Eric Rosengren said on Wednesday that he expects inflation to come down and be slightly above 2 per cent going into next year.

Mr Bostic said that "three or four months" of continued job gains should yield enough progress in the recovery of employment to consider pulling back on the bond purchases, a precursor in his view to raising rates.

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