“Supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed.”
By Wolf Richter for WOLF STREET.
Fed officials admitted they’d vastly underestimated the inflation surge, with doubts growing over its “transitory” nature, given the changes in inflation dynamics, including “labor shortages,” supply constraints, wage increases, and blistering demand. These factors might have a more “persistent” impact on inflation, according to the minutes of the FOMC meeting released today.
Tapering the asset purchases might start earlier than anticipated at the prior meeting. The housing market boom, fueled by “low interest rates,” is triggering concerns about “financial stability risks.” And tapering purchases of mortgage-backed securities “more quickly or earlier than Treasury purchases” is officially on the table “in light of valuation pressures in housing markets.”
So here are some salient gems from the minutes of the FOMC meeting.
Tapering asset purchases.
- Tapering may start “somewhat earlier than they had anticipated,” in light of incoming data – a view held by “various participants.”
- It’s “important to be well positioned” to taper “in response to unexpected economic developments,” such as inflation discussed throughout the minutes, or “the emergence of risks,” such as financial stability risks, mentioned later in the minutes.
- “Several participants saw benefits” to tapering MBS purchases “more quickly or earlier than Treasury purchases in light of valuation pressures in housing markets.”
- “Several participants” noted “that low interest rates were contributing to elevated house prices and that valuation pressures in housing markets might pose financial stability risks.”
Strong demand v. “labor shortages” and supply constraints.
The term “labor shortages” was mentioned five times in the minutes, along with material shortages, supply disruptions, and production bottlenecks. “Participants” saw these factors “as constraining the expansion of economic activity this year.”
A broad range of industries in participants’ districts were reporting that these constraints and shortages, including the labor shortages, “were limiting the ability of firms to keep up with demand.”
Businesses reacted to this mix of strong demand and shortages in various ways, including by “raising compensation to attract and retain workers” and “raising prices.”
The difficulty in hiring workers likely reflected “factors such as early retirements, concerns about the virus, childcare responsibilities, and expanded unemployment insurance benefits,” which “were making people either less able or less inclined to work in the current environment.”
“Many participants judged that labor shortages were putting upward pressure on wages or leading employers to provide additional financial incentives to attract and retain workers, particularly in lower-wage occupations.”
“Participants expected labor market conditions to continue to improve, with labor shortages expected to ease throughout the summer and into the fall.”
In their discussions on inflation.
Participants, surprised by the magnitude of the rise in inflation, “attributed the upside surprise to more widespread supply constraints in product and labor markets than they had anticipated and to a larger-than-expected surge in consumer demand as the economy reopened.”
Participants noted that many businesses in their Districts “had reported that higher input costs were putting upward pressure on prices.” And participants “generally expected inflation to ease as the effect of these transitory factors dissipated.”
“But several participants remarked that they anticipated that supply chain limitations and input shortages would put upward pressure on prices into next year.”
“Several participants noted that, during the early months of the reopening, uncertainty remained too high to accurately assess how long inflation pressures will be sustained.”
Doubts about “transitory” inflation crop up.
“Some participants judged that supply chain disruptions and labor shortages complicated the task of assessing progress toward the Committee’s goals and that the speed at which these factors would dissipate was uncertain.”
“Accordingly, participants judged that uncertainty around their economic projections was elevated.”
“A substantial majority of participants judged that the risks to their inflation projections were tilted to the upside because of concerns that supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed.”
“Several participants expressed concern that longer-term inflation expectations might rise to inappropriate levels if elevated inflation readings persisted.”
So there you have it.
Amid inflation that has knocked the wind out of the Fed’s inflation forecast, and inflation dynamics that are persistent in nature, such as inflation expectations, doubts are cropping up even at this Fed that this inflation surge will somehow just go away on its own, while the Fed continues to repress short-term interest rates to near-zero, and while the Fed is still repressing long-term interest rates by buying Treasury securities and MBS. And the Fed is signaling that change is afoot.
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