The US economy this year is likely to see its fastest growth in nearly four decades, but the short-term inflation spike that is to accompany the rebound is not a cause for concern, a top US Federal Reserve official said on Monday.
The world’s largest economy still needs to see several months of strong employment growth to achieve a full recovery, New York Federal Reserve Bank President John Williams said, stressing that the central bank would be in no hurry to alter its stimulative policies.
This year, the US’ GDP is likely to expand by about 7 percent as it bounces back from the COVID-19 pandemic, Williams said, calling it “welcome progress after the toughest period for the economy in living memory.”
“While I am optimistic that the economy is now headed in the right direction, we still have a long way to go to achieve a robust and full economic recovery,” Williams said in a speech to the Women in Housing and Finance annual conference.
He credited the Fed’s stimulative policies, including interest rates near zero, with having “positive effects” on the economy, enabling Americans to purchase homes and big-ticket goods.
“With accommodative financial conditions, strong fiscal support and widespread vaccinations, I expect that the rate of economic growth this year will be the fastest that we’ve experienced since the early 1980s,” he said.
However, as economic activity and consumer demand picks up after months of shutdowns, rising energy prices and the rebound from the pandemic downturn are pushing prices higher, fueling concerns about an inflationary spiral.
“It’s important not to overreact to this volatility in prices resulting from the unique circumstances of the pandemic,” Williams said.
He projected that inflation would fall back to the central bank’s 2 percent target next year “once the price reversals and short-run imbalances from the economy reopening have played out.”
US Federal Reserve Chairman Jerome Powell last week made the same point as he tried again to quell rising concern among investors and some economists, saying that there is a difference between “one-time price increases” and a persistent rise in inflation.
Speaking to reporters after the speech, Williams said that market expectations also point to a decline in inflation.
“A sizeable chunk” of the price spikes are due to comparison with the sharp declines in the early months of the pandemic lockdowns.
However, those effects would go away.
“Some of it really ... is arithmetic,” he said, but stressed that the Fed would be watching all of the factors driving prices.
Powell, in a speech on Monday, said that the US economic outlook had “clearly brightened,” but also cautioned that “we’re not out of the woods yet.”
He stressed that the pain of the economic crisis has hurt lower-income workers most, and black and Hispanic workers experienced larger job losses.
“The Fed is focused on these long-standing disparities because they weigh on the productive capacity of our economy,” Powell told a community development group.
“We will only reach our full potential when everyone can contribute to, and share in, the benefits of prosperity,” Powell said.
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