Weekly Economic Commentary

Chief Economist Scott Brown discusses current economic conditions.

The Federal Reserve’s views on the economy and monetary policy are often of fine gradation, leading to misquotes, misinterpretations, and misunderstandings. The April 27-28 FOMC minutes are a good example.

Officials recognized that base effects (a rebound in prices that were depressed a year ago) would boost inflation in the near term:

“Participants also noted that the expected surge in demand as the economy reopens further, along with some transitory supply chain bottlenecks, would contribute to PCE price inflation temporarily running somewhat above 2%.

What does the Fed mean by “transitory?” It is not a defined time period. It could be a few months, or perhaps a lot longer, but it doesn’t mean permanent. The U.S. has experienced many input price spikes over the last few decades, none of which have contributed to an increase in the underlying inflation rate. Supply chain bottlenecks will ease over time. What’s different this time is the magnitude, boosted by unexpectedly strong demand. Vaccines have arrived and been distributed sooner than anticipated, fiscal stimulus has been larger than was projected at the start of the year, and the nature of the pandemic (weakness in consumer services) has boosted demand for consumer goods far beyond pre-pandemic levels. As a consequence, input price pressure are more pronounced than usual. According to the FOMC minutes, “a number of participants remarked that supply chain bottlenecks and input shortages may not be resolved quickly and, if so, these factors could put upward pressure on prices beyond this year.”

Fiscal policy will remain supportive, but less so over time, becoming a headwind to GDP growth into 2022 (although offset by an expected rebound in consumer services). The increase in household savings built up over the last year will be reduced over time. The pandemic is still a restraint in the near term, but supply chains should improve over time.

Much was made of the comments about asset purchases: