Top Fed official sees low inflation running through 2022

A top Federal Reserve official said Wednesday that he expects inflation to remain below the central bank’s target level for nearly two more years, brushing off concerns that another round of federal stimulus could overheat the economy.

Eric Rosengren, president of the Federal Reserve Bank of Boston, said he doesn’t expect high inflation to be a “significant problem in the near term” due to the deep labor market damage caused by the coronavirus pandemic.

“What we really want for inflation is kind of the broad based inflation rate to be at a sustained level of 2 percent. I don’t think we’re going to see that this year. I’d be surprised if we see it before the end of next year,” Rosengren said during a Wednesday webinar.

“While inflation is something that any central banker should always be looking for, I do think that coming out of the last decade, it’s hard to expect that it’s going to be a significant problem in the near term,” he added. 

Rosengren is the latest Fed official to express skepticism of fears among Republican lawmakers and some economists that another trillion-plus coronavirus aid bill could spur rampant price and wage increases. 

President Biden and congressional Democrats have lined up behind a $1.9 trillion pandemic response and economic relief bill that includes a third round of stimulus checks, an extension of expanded unemployment benefits, support for state and local governments and aid to small businesses.

Biden, Treasury Secretary Janet Yellen and a wide range of economists have argued that the costs of not approving enough aid are far greater than increasing inflation. Fed Chair Jerome Powell has made similar arguments without directly endorsing Biden’s bill, insisting that inflation fears are no reason to hold up much-needed relief for struggling families.

Supporters of Biden’s approach also note that inflation has remained below the Fed’s 2 percent target for years, including when the unemployment rate was a 50-year low of 3.5 percent.

But critics of another massive bill, which include some center-left economists, have expressed fears that nearly $2 trillion in aid passed potentially within months of the pandemic retreating could be too much.

Rosengren said Wednesday that with millions of Americans out of the workforce, thousands of storefronts shuttered and wide swaths of the economy unable to fully recover until next year, the economy won’t likely be strong enough to push inflation higher even with substantial aid.

“If you walk around downtown Boston, it’s really striking how many restaurants, bars and those types of businesses have been shut down. Many of them are completely empty at this point,” he said.

“If we have more bankruptcies over the next few months, in the next couple of quarters that makes it that much harder to re-employ people,” he added. “So hopefully, between the fiscal spending and low interest rates, many businesses will be bridged to that point where we’re back to a more normalized economy.”

Rosengren added that a steady amount of moderate inflation helps the economy by pushing interest rates above current ultra-low levels and giving the Fed more room to respond to trouble in the economy.

“If inflation is literally at zero and the real interest rate is very low, it means interest rates during economic downturns are going to hit zero very regularly, which makes it much more difficult for monetary policy to react when we have economic downturns. So one reason why a little inflation is a good thing, is it gives us the flexibility for monetary policy to react to negative shocks,” he said.