It’s time to stop calling inflation transient, says Yellen

Janet Yellen, the US Treasury secretary, said on Thursday that she believed it was time to stop characterizing inflation as temporary and hinted that the omicron variant of the coronavirus could prolong the problem of rising prices .

Yellen said that last quarter it looked like the pandemic was receding and that the economy would soon return to normal. But the spread of new variants of the virus has changed that picture, he said.

“Now the new variant, omicron, means that the pandemic could stay with us for quite some time, hopefully not choking economic activity but affecting our behavior in ways that contribute to inflation,” Yellen said, speaking at an event sponsored by Reuters.

Yellen’s statements echoed those of Jerome Powell, chairman of the Fed (Federal Reserve), the US central bank, who said earlier this week that inflation was more than a short-term problem.

“I am ready to abandon the use of the term ‘transient,'” said Yellen. “I accept that this is not an adequate description of what we are facing.”

Yellen said it was too early to say what impact the omicron variant might have on the economy. It could cause additional problems in supply chains, the secretary pointed out, but if it results in a slowdown in economic growth, it could also contain price increases. Yellen warned, however, that the variant could cause “significant problems.”

“We are very unsure at this point about the degree of threat it poses,” Yellen said. “Hopefully it won’t be something that will significantly slow down economic growth.”

Yellen, who previously chaired the Fed, said the central bank was determined to use its resources to curb inflation, but said there was little the bank could do to unravel the jumbled supply chains. She said Powell’s suggestion this week that the Fed could accelerate its plans to withdraw its financial support for the economy “makes sense”.

“What we don’t want to see developing is a price and wage spiral, in which inflation becomes a self-reinforcing phenomenon that could become chronic in the US economy, something endemic,” Yellen said.

Her comments came after more Fed officials signaled growing concern that inflation, whose long-term central bank target is 2% a year on average, is proving more durable than previously expected.

Last month, the Fed announced that it would begin to cut its monthly purchases of $120 billion (BRL 676 billion) in bonds by $15 billion (BRL 84.5 billion) a month, which would mean that its program support would end by June. These large-scale bond purchases keep money circulating in financial markets.

Randal Quarles stated in his last speech as a Fed board member on Thursday that he would “certainly support” ending the bond-buying program sooner. Quarles will leave his position at the US central bank at the end of the year.

He said the rise in inflation “may no longer be due to supply bottlenecks,” and that the Fed might have to react faster in order to rein in demand.

“We’re not talking about a pre-Covid level demand and supply issue that is taking a while to get back to its pre-Covid capability,” he said at an event hosted by the American Enterprise Institute. “Instead, we are seeing higher sustained demand.”

Mary Daly, chairman of the San Francisco Federal Reserve, said at an event hosted by the Peterson Institute of International Economics that the Fed may need to accelerate the end of its bond-buying program and begin “making a plan” to at least consider one. rising interest rates, which have been close to zero since the beginning of the pandemic.

Daly said the central bank would not aim to completely withdraw support, “but begin to reduce the amount of accommodation we are providing at a time when the economy appears to be on its way to sustaining itself without assistance.”

Raphael Bostic, chairman of the Federal Reserve Bank of Atlanta, told a Reuters event Thursday that high inflation and advances in the labor market made it appropriate for the Fed to end its bond purchases by the end of the first quarter of next year. If interest rates are forecast to reach as much as 4% next year, he said, there would be “a good argument” for the central bank to advance its interest rate hike.

Translated by Paulo Migliacci.