Kansas City Federal Reserve President Esther George, one of the hawks at the central bank’s policy table, said Tuesday that she’s worried inflation is brewing and could surprise to the upside.
In general terms, most Fed officials think inflation won’t hit the central bank’s target, for inflation to “average 2%,” for the next three years.
In a speech to the Central Exchange, George said that some goods prices are already moving up sharply.
“Such a scenario does not suggest higher inflation is a near-term threat, but rather that inflation could approach the FOMC’s average inflation objective more quickly than some might expect,” George said.
There are already some distortions in the price data, the Kansas City Fed President said.
While the Fed’s favorite measure of inflation – the personal consumption expenditures price index, remains muted, a few hard-hit services prices like airline fares and hotel stays have played a disproportionate role in depressing the aggregate index, George said.
“To the extent that a post-vaccine bounce-back boosts demand and prices in these sectors…inflation could move up quickly,” George said.
A return to 2% inflation would be viewed as a success for the Fed, which has struggled to move prices back to its target since it was adopted after the financial crisis in 2008.
But rising inflation could call into question how long the Fed needs to hold interest rates at zero and continue its quantitative easing through purchases of $120 billion of Treasurys and mortgage-backed assets each month.
In her remarks, George said “it is too soon the speculate about the timing of any change” in the Fed’s policy stance.
Last week, St. Louis Fed President James Bullard said “inflation may be higher that we’re used to” this year.
Neither George or Bullard are voting members of the FOMC this year. In general, most Fed officials think inflation will only move up gradually.