There are three schools of thought about what generates inflation, but no matter which one you like, they’re all pointing in the same direction — towards higher inflation, said St. Louis Fed President James Bullard on Wednesday.
If you are from the school that thinks inflation is mostly caused by money supply, well the central bank’s money supply has “exploded” and the Fed has said its more relaxed about that then it used to be, Bullard said during a conversation sponsored by Reuters.
If you think that fiscal deficits lead to higher prices, those are “off the charts,” Bullard said.
And if you think that the cause of inflation is a hot economy that looks like ‘it is going to be just around the corner,” Bullard said.
“So no matter where you’re coming from or what you think are the major determinates are, at least over the medium term for inflation, they’re all pointing in the same direction,” he said.
The St. Louis Fed president is not a voting member of the Fed’s interest-rate committee this year.
“It has been a long time since we’ve seen very much inflation in the U.S. but we’ll keep an eye on this as 2021 goes along,” Bullard said.
Last week Bullard said he thought inflation might be higher this year than it has been for quite some time.
The Fed has hit its 2% inflation target only briefly since it was first adopted in 2012.
The Labor Department reported earlier Wednesday that the consumer price index rose 0.4% in December, the fastest clip since the summer. On a year-over-year basis, the CPI index accelerated to 1.4% rate, up from 1.2% in the prior month and has now edged up for seven months in a row. That’s still well below the Feds 2% target though, which is tied to a separate personal consumption expenditure price index.
Yields on the benchmark 10-year Treasury note hit 8-month highs earlier this week before retreating Wednesday. Part of the rise was tied to expectation of additional fiscal stimulus under the new Biden administration.
Other analysts blamed some Fed officials, who have said the central bank might taper its bond purchases in 2021 if the economy is strong enough.
The Fed has been buying $120 billion per month of Treasurys and mortgage-backed securities since June.
During the Reuters event, Bullard refused to be drawn into that discussion, saying he was happy with the Fed’s guidance to the market that asset purchases would continue until there is “substantial progress towards our goals.”
“I’d rather stick to that, because it is an uncertain situation,” Bullard said, adding “I don’t want to put specific dates on things at this point.”
Stocks were trading higher early Wednesday. The Dow Jones Industrial Average
was up 3 points ahead of the House impeachment vote.