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Fed could face inflationary fire, higher consumer prices

Media Contact

Rebecca Valli

The Federal Reserve is scheduled to wrap up its two-day meeting on Wednesday afternoon, when it will announce its latest policy decisions. While experts do not anticipate a significant shift in the central bank’s posture, many are looking for signs on how the Fed is planning for potentially high inflation in the near future. 


Sarah Wolfolds

Assistant professor of applied economics and management

Sarah Wolfolds, assistant professor of applied economics and management at Cornell University, says the Fed may continue to allow higher inflation rates to buy itself more flexibility responding to future downturns. Wolfolds worked at the at the Federal Reserve Board of Governors, studying financial stability and securitization, and at the Philadelphia Federal Reserve, working on regional manufacturing conditions.

 

Wolfolds says:

“The Federal Reserve’s reaffirmation of the 2012 Monetary Policy Strategy strongly indicates that the Fed intends to allow (and perhaps even encourage) inflation rates higher than we have seen in the past 15 years, with a goal of achieving a long run 2% average inflation rate. The Fed indicated that this policy is ‘most consistent over the longer run with the Federal Reserve’s statutory mandate.’

“A higher average permitted inflation rate, besides reassuring markets that it would not slam on the brakes if inflation briefly exceeded 2%, would provide the Fed with flexibility in responding to downturns. The higher permitted inflation rate would tend to increase the average federal funds rate. The Fed could then be able to effectively respond to economy downturns by lowering that rate when needed, something unlikely to work at the current low funds rate. 

“The recent massive government stimulus spending may well lead to higher inflation in the near future; the Fed’s statement helps to clarify market expectations about its planned response to moderate, and even sustained, levels of inflation above the 2% level.”

Shawn Mankad

Assistant Professor

Shawn Mankad, assistant professor of management at Cornell University, studies the intersection between data analytics and economic decision-making using machine learning techniques. He was a consultant with the U.S. Commodity Futures Trading Commission and also worked at the Federal Reserve Board on characterizing market activity with visual analytic tools.

 

Mankand says:

“The near-zero interest rate environment, emergency lending, rapid increase in the money supply, and extraordinary federal account deficits have combined to help create weakness in the dollar. 

“If this trend accelerates, the price of imports should continue to rise and eventually impact consumer prices. According to the latest Bureau of Labor Statistics report, import prices rose 0.9% in August, well above the 0.5% estimate, while the 0.7% rise initially reported for July was revised upward to 1.2%. 

“The data shows that the clock is ticking, and that the Federal Reserve could be forced to focus on putting out an inflationary fire sooner than later.”

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