NEW YORK (Businesshala) – Both supply-side and demand-side factors are contributing to US inflation right now, but most of the current price changes may be driven by pandemic-related changes that could ease over time, the Cleveland Federal Reserve Bank said. President Loretta Meester said on Thursday.
During a panel organized by the European Central Bank, Meester said policymakers need to separate short-term inflationary pressures from inflation that may be long-lasting when determining how to respond.
“How much of that growth is driven by supply shocks and how much of that is driven by demand that will respond to monetary policy?” Meester said.
An increase in medium- and long-term inflation expectations, coupled with a continued increase in inflation, could be a sign that price changes are being driven more by higher demand than policymakers expected, Meister said. However, Fed officials, who will have a vote on the Fed’s policy-making committee next year, said this was not their baseline forecast.
“Right now, my view is that it is related to the pandemic, but we will have to wait and see,” Meester said.
Meester said it may take longer than initially expected to address some of the supply-side challenges due to the pandemic and that policymakers will keep an eye on those upside risks to inflation. But there are consequences for responding too quickly, she said.
“Fundamentally, if it’s supply-side driven, that’s not something that monetary policy should respond to,” Meester said, adding that officials should keep an eye on inflation expectations and other indicators to see if the monetary The policy is too favorable or not providing enough housing. .
Fed officials have indicated they may begin reducing the US central bank’s $120 billion in monthly asset purchases as soon as November.
Policymakers have set a high bar for raising interest rates, which Meester previously said could be accomplished here by the end of 2022 if the labor market continues to improve.