WASHINGTON—A top Federal Reserve official said on Wednesday he was surprised by a larger-than-expected jump in inflation last month, but stressed that more data would be necessary for the central bank to begin scaling back its easy-money policies.
“I was surprised,”
the Fed’s vice chairman, said of the 4.2% increase in consumer prices in April from a year earlier. “This number was well above what I and outside forecasters expected.”
Mr. Clarida said he believes most of the recent acceleration in prices will prove transitory as the economy works through supply and demand mismatches that emerged during the pandemic. But he added that policy makers will be monitoring measures of long-term inflation expectations “very closely” and will act if they start to drift upward.
“If, contrary to our baseline view, demand relative to supply was excessive and persistent and pushed up inflation and inflation expectations to levels that were not potentially consistent with our mandate,” Mr. Clarida said, “we would not hesitate to act and to use our tools to bring inflation back down to our 2% longer-run goal.”
Since last year, the Fed has held overnight interest rates near zero and purchased at least $120 billion a month of Treasury and mortgage bonds to smooth the economy’s recovery from the recession caused by the Covid-19 pandemic.
Some economists say those policies, combined with trillions of dollars of fiscal stimulus enacted over the past year, are causing demand for goods and services to outstrip supply, driving inflation sharply higher.
Fed officials reiterated in April their intention to leave rates unchanged until the economy has achieved the central bank’s goals of full employment and 2% average inflation. They have said since December they plan to continue buying assets at the current pace until “substantial further progress” has been made toward those objectives, a standard that Mr. Clarida said Wednesday “is likely to take some time” to achieve.
“Right now that means focusing especially on the labor market,” Mr. Clarida said in a virtual appearance for the National Association for Business Economics International Symposium. He said he was also surprised by a report last week that showed hiring in April fell well short of expectations. The labor market’s recovery would take until late 2022 if the recent pace of job creation holds steady, he added.
“Honestly, we need to recognize that there’s a fair amount of noise right now, and it will be prudent and appropriate to gather more evidence,” Mr. Clarida said.
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