Top Fed Official Downplays Inflation, Warns Against Acting Early

The current spike in inflation is unlikely to pose a persistent threat to the US economy, and prematurely heeding calls to act could derail the recovery from the Covid-19 downturn, a top Federal Reserve official said Wednesday.

Fed Vice Chair Randal Quarles also said he is optimistic about the country's growth prospects and economic outlook thanks to a stockpile of consumer savings that will boost spending.

But policymakers will "remain patient" before tapping the breaks on stimulative policies, to ensure jobs recover and return to what the central bank considers full employment, Quarles said in a speech to The Brookings Institution.

The Fed has pledged to keep the benchmark lending rate at zero and continue its massive bond buying program until unemployment comes down from the current 6.1 percent and inflation is on track to stay above 2.0 percent.

But some economists are wary the US central bank is getting behind the curve as a key inflation index hit 2.3 percent in March.

Quarles underlined the Fed's view that most of factors causing prices to rise are temporary.

"I expect inflation to begin subsiding at some point over the next several months and to be running close to two percent again at some point during 2022," he said.

"Therefore, we need to remain patient in the face of what seem to be transitory shocks to prices and wages."

He acknowledged that there are some factors driving up prices that cannot be attributed to temporary factors, but said the central bank has the ability to address a more worrying inflation increase.

Fed officials "are not prophets," but, "if we're wrong, we know how to bring inflation down," Quarles said.

"It would be unwise for us to take actions that might slow the recovery prematurely by trying to stay ahead of inflation, when our best estimate is that we are not far behind."

Quarles said he was "not worried about a return to the 1970s" -- an era when US inflation spiked above 10 percent and aggressive Fed interest rate hikes led to a damaging recession.

The uneven recovery in US trading partners and supply bottlenecks pose headwinds to the American economy, but generous government stimulus programs mean consumers have an "accumulated stock of savings (that) will support spending for many months to come," Quarles said.

If growth continues as expected, it will soon be time for officials "to begin discussing our plans to adjust the pace of asset purchases."

But even when the central bank begins to raise its policy interest rate, "I expect that monetary policy will remain highly accommodative for some time," Quarles said.