US economy’s rebound sets up test of Fed’s new pledge

    466

    The stronger-than-expected US economic rebound from coronavirus lows could set up an early test for the Federal Reserve’s new pledge to keep interest rates near zero and its increased tolerance for inflation.

    A compilation of surveys and interviews conducted in September and early October by the Fed’s 12 regional banks shows the economy recovering at a “slight to modest pace” as consumers bought homes and increased spending.

    Indeed the US economy probably grew by more than 30 percent on an annualized basis last quarter, economists say, making up most of the 31.4 percent drop in the second quarter.

    The increase has been fueled by a $2.3 trillion pandemic relief package and trillions more injected into financial markets by the Fed.

    “Traditional ideas about inflation would suggest that this is actually a time when you may see some inflation,” St. Louis Fed President James Bullard said at an event hosted by the Federal Home Loan Bank of Des Moines. He said increased government spending to combat the virus and “bottlenecks” in an economy not designed to grow as fast as it is are setting the stage for a rise in prices.

    “On top of that you’ve got a Federal Reserve that’s saying, if we do get inflation, we’d welcome it,” he said.

    With businesses adapting to the virus and daily deaths much lower than in the pandemic’s early stages, he said, US economic growth will likely be above trend for quite a while, “so this might be an era where you might see somewhat more inflation.”

    The Fed last month pledged not to raise interest rates until the economy returns to full employment and inflation reaches the Fed’s 2 percent goal.

    But policymakers’ tolerance above that 2 percent mark varies. Chicago Fed President Charles Evans said this week he’d be okay with a year of 2.5 percent to 2.75 percent inflation, while Dallas Fed President Robert Kaplan has signaled anything more than 2.25 percent could raise concern.

    Inflation is currently trending below 2 percent but with the recent surge in growth, that soon could change.