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May 12, 2021, 11:24 a.m. EDT

Fed’s Clarida sees risks of higher inflation and a weak labor market

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Greg Robb

Federal Reserve Vice Chairman Richard Clarida on Wednesday said it may take longer to reopen the economy than it did to shut it down during the coronavirus pandemic and his concerns range from the possibility of both higher inflation and weaker employment than economists expect.

The Fed has been hit by two major data surprises. Last Friday’s weaker-than-expected April job report and Wednesday’s hotter-than-expected April consumer prices.

In a discussion with the National Association for Business Economics, Clarida said he was surprised by the strength of the government report that showed the consumer price index jumped 0.8% in April.

As the economy reopens, “we could have more persistent imbalances between aggregate demand and supply that would put more persistent upward pressure on inflation than we and outside forecasts expect,” Clarida said Wednesday after the inflation data was published.

If stronger demand relative to supply persisted and pushed up inflation higher than the Fed’s stable 2% target, the central bank would not hesitate to act, he said.

He said he still expects price gains as the economy reopens to be one-time price increases with temporary effects on inflation.

“I expect inflation to return to – or perhaps run somewhat above – our 2% longer-run goal in 2022 and 2023,” he said. This would fit under the Fed’s new policy framework, he noted.

After looking at the details of the April job report published last Friday, Clarida said was concerned about the immediate prospects for job growth.

“The near-term outlook for the labor market appears to be more uncertain than the outlook for activity,” Clarida said.

The labor market added 266,000 jobs in April , well below market expectations of one million new jobs.

There is a “necessary rebalancing of labor supply and demand, he said. What this means for wage and price dynamics “will depend importantly on the pace of the recovery in labor force participation as well as the extent to which there are post-pandemic mismatches between labor demand and supply in specific sectors of the economy and how long any such imbalances persist,” he said.

Clarida said that employment remains 8.2 million below its pre-pandemic peak.

“At the recent pace of payroll gains – roughly 500,000 per month over the past three months – it would take until August 2022 to restore employment to its pre-pandemic level,” Clarida said.

The Fed has been buying $120 billion of assets, along with keeping its policy rate close to zero, to support the economy.

Fed officials have said they want to see “substantial further progress” in their two goals of full employment and stable 2% average inflation before cutting back on the pace of purchases.

Clarida said it would likely take “some time” for this benchmark to be reached, giving no hint that he wants to start a formal discussion of when it would be appropriate to start to taper asset purchases.

Is it time to taper, Clarida was asked. “Not yet,” he answered.

“It is fair to say, sitting here in the middle of May, we have not made substantial progress towards our labor market objectives,” Clarida said.

“We need to recognize that there is a fair amount of noise right now and that it will be prudent and appropriate to gather more evidence before we make that judgement,” he added.

Stocks /zigman2/quotes/210598065/realtime DJIA -1.58% /zigman2/quotes/210599714/realtime SPX -1.31% were sharply lower on Wednesday after the strong inflation reading. The 10-year Treasury yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -4.60% rose after the inflation data.

US : Dow Jones Global
-533.37 -1.58%
Volume: 563.92M
June 18, 2021 4:20p
-55.41 -1.31%
Volume: 3.59B
June 18, 2021 4:20p
add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
-0.07 -4.60%
Volume: 0.00
June 18, 2021 4:55p

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