Outgoing Fed Vice Chairman Richard Clarida, in what is likely his last comment in office on the economy, said Thursday that he still believes the higher inflation seen over the past year will be “transitory,” meaning it will reverse without leaving much trace on the economy.
“I continue to believe that the underlying rate of inflation in the U.S. economy is hovering close to our 2% longer-run objective and, thus, that the unwelcome surge in inflation in 2021, once these relative price adjustments are complete and bottlenecks have unclogged, will in the end prove to be largely transitory under appropriate monetary policy,” Clarida said in an academic paper released by the central bank.
Other top Fed officials won’t touch the word “transitory” with a 10-foot pole. The term is viewed as completely discredited.
From the archives (November 2021): Powell says it’s time to retire ‘transitory’ when talking about inflation
Early last year, Fed officials has expected inflation to run its course by the end of the year. But it has lasted much longer than they expected. Consumer prices in December were up by an annualized 7%, a rate unseen in 40 years.
Perhaps Clarida doesn’t mind using the term because he is set to leave his Fed post on Friday.
In his paper, Clarida said core PCE inflation since February 2020 is running at a 3% annual rate through October. There have been a lot of “relative” or one-off price gains as the economy reopens, he noted. He noted that the latest forecast from Fed officials is for inflation to only moderately exceed 2% in 2022 and 2023.
Clarida defended the Fed’s new policy framework adopted in the fall of 2020. He was one of the principal authors of the new strategy. “I think the new operating framework serves us well,” he said.
With inflation running so high, outside observers are questioning all of the central bank’s decisions since the pandemic.
Sen. Pat Toomey, a Republican from Pennsylvania who is the ranking member on the Senate Banking Committee, said earlier Thursday that the Fed “should really re-evaluate this new framework,” which, he said, “risks keeping an inflation tax on all Americans.”
Clarida, a well-known forecaster and economist before joining the central bank, is leaving under an ethics cloud.
His financial disclosure forms, which had to be amended, show he was actively trading early in 2020 just as it was dawning on Fed officials what a serious threat the coronavirus pandemic posed for the U.S. economy and financial markets.
Wall Street reformers have been scathing in their criticism of Clarida and two other top Fed officials.
Earlier Thursday, Fed governor Lael Brainard, who has been nominated by President Joe Biden to replace Clarida in the No. 2 post at the central bank, said she and her colleagues have been “surprised and dismayed by some of the financial disclosures.”
Stocks turned lower in late trading on Thursday, with the tech-heavy Nasdaq Composite
COMP,
down 2%. The yield on the 10-year Treasury note
TMUBMUSD10Y,
sank close to 1.7%.
