With strong demand and limited supply driving inflation throughout the economy, the clock may be ticking on how long the Federal Reserve can wait before raising interest rates in response, according to a US central banker on Friday.
"As supply chains heal and demand eases, there is reason to expect inflation will eventually moderate, but it is also clear that the risk of a prolonged period of elevated inflation has increased," Kansas City Fed President Esther George said in remarks prepared for delivery to an energy conference. "The argument for patience in the face of these inflation pressures has diminished."
The Fed took the first step toward a more normal monetary policy this week, reducing its monthly asset purchases at a rate that will see them phased out completely by mid-2022.
Fed Chair Jerome Powell stated that the start of the bond-buying taper should not be interpreted as a direct signal of when the Fed will raise interest rates.
George, whose policy leanings are typically hawkish, did not say when she favors a rate hike, but her comments suggest she does not want to wait too long and risk inflation spiraling out of control.
She pointed out that most of the time, Fed policymakers do not have to choose between achieving price stability and employment goals.
"There are however times when the objectives can appear to be in conflict," George said. "And now might be one of those times with inflation running well ahead of its longer-run average and labor markets appearing to have further room to recover."
Additional Comments From George
There is no doubt that we are in a tight labor market today. It will be a question of whether workers on the sidelines will come in overtime to determine if we have reached maximum employment; this is likely to happen. The labor market's tightness may only be transitory.
I agree that inflation should decrease as things adjust. We'll be keeping an eye on inflation expectations and wage inflation. Inflation will most likely moderate
Continued removal of accommodation will be critical to how the economy develops.
We're seeing healthy, if not frothy, asset valuation; however, we must be cautious of potential imbalance.