Fed’s Quarles: More stimulus lets inflation continue longer

A top Federal Reserve official said he expected elevated inflation pressures to decline without requiring a more aggressive response by the central bank next year.

Fed Governor Randal Quarles says he is watching for signs that higher demand will keep prices elevated even after bottlenecks abate, but he warned of growing risks to that forecast, including from additional government spending being contemplated by the Biden administration.

The U.S. inflation rate reached a 13-year high recently, triggering a debate about whether the country is entering an inflationary period similar to the 1970s. WSJ’s Jon Hilsenrath looks at what consumers can expect next.

Quarles said that while it is high time for fiscal policy makers to begin dialing down the bond buying program, however it would be premature to start raising interest rates when inflation is at such current hikes. Quarles gave his speech Wednesday

Quarles’ Key Comments
Supports decision at November meeting to reduce fed’s asset purchases, end taper by mid-2022.
It’s clear we’ve met test for taper.
Fed is not behind the curve on inflation fight.
Fed remains patient to allow more recovery in jobs.
Inflation would likely decline considerably in 2022, however upside risks will remain significant.
Monitoring how additional fiscal programs could further boost demand.
Constraining demand now would be premature.
Will wait to see further improvements in employment, evolution of inflation during upcoming months.
If inflation does not recede next year, or if expectations become un-anchored, fed’s tools can bring inflation down.
Strong economic growth for rest of 2021 and 2022.
Strong demand for labor outpacing supply, pushing up wages.
Labor force participation unlikely to return to pre-pandemic level.

The market has been watching lest Fed should hike and tapering start imminently and the US dollar is giving back some initial gains since the Fed started to turn hawkish over the last couple of meetings. The dollar index, DXY, was last down 0.23% at 93.57 as risk sentiment on the day has improved.