Managing inflation will be one of the toughest challenges for US policymakers in coming months as price pressures grow from an economy rebounding rapidly from the coronavirus pandemic, Charles Evans, president of the Chicago Federal Reserve said on Wednesday.
"Needless to say, it has been a very challenging year in so many respects", Evans said in a speech on the economy distributed by the Chicago chapter of the US central bank. "But I am very optimistic about our economy’s growth prospects, and am hopeful that our employment goal will be in sight before too long. Yet, despite some recent price increases, achieving our inflation goal may prove more difficult".
The Fed has the dual task of ensuring maximum employment for Americans and keeping inflation growth at an average of 2 percent a year.
Evans’ comments came after US Treasury Secretary Janet Yellen said Tuesday that US interest rates might have to rise from their current near-zero levels to prevent overheating of an economy reopening from pandemic lockdowns.
Yellen also said the Biden administration’s spending plans in the coming months would involve some reallocation of resources within the economy that “could cause some very modest increase in interest rates.”
President Joe Biden, who managed to get Congress to approve a COVID-19 relief bill of $1.9 trillion in March, is planning a $2.3 trillion infrastructure bill next under his so-called American Jobs Plan.
US interest rates have been held at between zero and 0.25 percent since March 2020 to aid recovery from the pandemic.
Fed Chairman Jerome Powell said last week the central bank had no plans of raising rates for now, despite its projections that the economy will rebound 6.5 percent this year from a 3.5 percent decline in 2020.
Powell acknowledged the surge in prices of commodities and other materials with the recovery in the economy but called such inflationary pressure “transitory.”
Evans said core inflation excluding food and energy prices rose by 1.8 percent in March from a 1.4 percent decline in February.
"I was not surprised to see such an increase, and I expect to see some further pickup in inflation in the coming months", he said. "Part of the increase will be purely mechanical as the low inflation reading from April of last year falls out of the 12-month calculation — a factor that boosted year-over-year inflation in March as well. In addition, as the virus subsides and people resume normal activities, demand should pick up further for those goods and services that are most affected by the pandemic, pulling their prices up to more typical levels".
He said supply chain bottlenecks were also developing as demand exceeded supply for steel, computer chips, construction materials, appliances and other items.