Fed Official Sees Risks of More Persistent Inflation

A Federal Reserve official warned in a speech Wednesday night of growing risks that supply-chain disruptions could keep inflation elevated for longer than forecasters have anticipated.

While monthly inflation readings should decline from high rates observed in the spring, “I still see a material risk that supply-related pricing pressures could last longer than expected,” said Fed governor Michelle Bowman in remarks prepared for delivery at South Dakota State University in Brookings, S.D.

The Labor Department reported Wednesday that so-called core prices, which exclude volatile food and energy categories, rose 4% in September from a year earlier, matching the year-over-year increase reported in August. On a year-over-year basis, inflation has been rising at the fastest pace in 13 years since May.

Ms. Bowman also cited a drop in the number of Americans looking for work, together with employers’ difficulty recruiting workers despite offering higher wages and other benefits, as factors that added to potential inflationary pressures.

“Employers are having a very tough time filling jobs,” she said. “It is clear that switching off economic activity for such a long period has had lasting consequences, and expectations of a smooth resumption of production, transportation, and business operations may not be met for some time.”

Ms. Bowman said a slowdown in the pace of payroll growth witnessed in August and September reflected a limited supply of workers. An increase in the number of people who had left the labor force after being temporarily laid off last year, together with particular challenges faced by small-business owners, would make it challenging to close a shortfall of around five million jobs from February 2020, she said.

“For several reasons that are unrelated to the stance of monetary policy, I don’t expect that we will see employment fully return to pre-pandemic levels any time soon,” she said.

Ms. Bowman didn’t address her views on potential interest-rate increases in her prepared remarks. She said she supported plans to taper the Fed’s $120 billion in monthly bond purchases over a roughly eight-month period beginning next month.

“Our asset purchases were an important part of our response to the economic effects of the pandemic, but they have essentially served their purpose,” she said. Elevated asset values, including in housing markets, are a sign that any “remaining benefits to the economy from our asset purchases are now likely outweighed by potential costs.”