Fed Officials Have Six Reasons to Bet Inflation Spike Will Pass

While much of Wall Street is ringing alarms about out-of-control inflation, Federal Reserve Chair Jerome Powell and his colleagues are expressing confidence in a more benign outlook.

Acceleration in U.S. price growth this year will have “only transitory effects on underlying inflation,” Fed Vice Chair Richard Clarida said Wednesday.

Governor Lael Brainard said the day before that officials should be “patient through the transitory surge.” Powell has made the same argument.

Such arguments are harder to make after consumer prices climbed in April by the most since 2009 and prices paid to producers rose in the same month by more than forecast.

While policymakers expect the Fed’s preferred measure of inflation to rise to around 2.4% this year as the economy reopens and the pandemic recedes, they forecast it to return to their 2% goal for 2022.

“The case is really quite strong for the outlook for inflation being quite moderate,” said David Wilcox, a former head of the Fed’s research division and now a senior fellow at the Peterson Institute for International Economics. “The basic strategy is exactly the right one, which is to project a realistic confidence about the outlook for inflation, combined with a readiness to pivot if circumstances change.”

Much is at stake. The Fed’s new policy framework, approved last August, pledges more patience in viewing inflation. It now aims for an average of 2% over time, including some overshooting for past misses, and want to achieve more inclusive employment that aids lower-income workers and minorities.

Here are six reasons why Fed leaders are confident inflation pressures will be transitory: