Fed’s Mester says supply shocks potentially require policy response

REUTERS
REUTERS

Summary

  • Cleveland Fed president says central bank might no longer be able to ignore inflation sources that monetary policy can’t easily address

Federal Reserve Bank of Cleveland President Loretta Mester said Wednesday that the central bank might no longer be able to ignore sources of inflation that monetary policy can’t easily address given how those types of rising prices can affect consumers’ moods.

Ms. Mester, who is a voting member of the rate-setting Federal Open Market Committee this year, assessed in her prepared text what inflation expectations mean for central-bank policy. She didn’t address the near-term monetary-policy outlook.

Fed officials agree that where inflation is expected to go is a strong determinant of where price pressures stand. The central bank is raising rates aggressively to curtail inflation, and while short-term inflation expectations have risen a lot, longer-term expectations have been more stable. For the Fed, that suggests that the public remains confident that inflation pressures will eventually abate, officials have said.

The challenge is that there is no settled science for measuring inflation expectations. Meanwhile, much of what drives inflation now are supply-related shocks from food and energy factors that monetary policy can’t do much to address, according to many economists.

Ms. Mester said the impact that supply-related shocks have on expectations suggest that the Fed should take on board and react to these price changes, in large part to help keep inflation expectations from rising.

“Central banks will need to be resolute and intentional in taking actions to bring inflation down," Ms. Mester said.

Ms. Mester said there are times when supply shock driven inflation surges “could threaten the stability of inflation expectations and would require policy action." She didn’t say that such a view applies to current circumstances.

This story has been published from a wire agency feed without modifications to the text

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