Gold is up. Dollar is down. Is inflation back on the worry list?
| Washington
The whiff of inflation is in the air.
As improbable as it sounds in this low-inflation era, some signs point to a future period of rapid rises in consumer prices.
One is the price of gold. Long seen as a hedge against runaway prices, the yellow metal is trading within 5% of its all-time high. Billionaire investor Warren Buffett, who in the past has downplayed the precious metal, recently bought shares in a gold-mining company.
Why We Wrote This
Central banks around the world have taken dramatic steps to support economies during the pandemic. The balance between stimulating growth and guarding against inflation isn鈥檛 an easy one.
Another signal is the U.S. dollar. While still viewed by many as a haven from financial storms, its value has been sagging versus other major currencies in recent months. And Rochelle Jones, a young worker and student living near Washington is seeking alternatives to the dollar as a safeguard of her own financial future. Already a buyer of cryptocurrency before the coronavirus pandemic, she鈥檚 now buying investments in gold as well.
What鈥檚 triggered these concerns is America鈥檚 central bank, the U.S. Federal Reserve. It has won widespread praise for its recent moves to stave off a pandemic-led recession with echoes of the Great Depression of the 1930s. In so doing, however, some analysts worry that it is setting the stage in the long term for the opposite problem: a high-inflation era like the 1970s.
鈥淚 think they鈥檝e done a great job in saving us from a depression,鈥� says Desmond Lachman, a monetary policy expert at the conservative American Enterprise Institute in Washington. But, 鈥淚 think that that is inviting trouble down the road.鈥�
His specific criticism: a subtle policy change last month, where Federal Reserve Chairman Jerome Powell said the bank would be more tolerant than in the past of inflation during economic expansions.
U.S. Bureau of Labor Statistics
Pumping the accelerator
As the central bank to the world鈥檚 largest economy, the Fed acts as a kind of chauffeur. If the economy is growing too slowly, it pushes down the accelerator by lowering official interest rates. Reducing the cost of borrowing typically causes businesses and consumers to take on more debt and spend more, which boosts the economy. By contrast, if the economy is growing too fast, and prices look to skyrocket because there鈥檚 too much demand for goods and services, the Fed eases off the gas by raising interest rates.
For now, America鈥檚 most widely watched inflation gauge, the consumer price index, shows little momentum. In July, the index showed average prices for goods and services rose only 1% from a year before. Pressure on consumer prices is similarly minimal in other industrialized nations.聽
Yet both now and before the pandemic, at least a fifth of U.S. forecasters saw monetary policy as 鈥渢oo stimulative鈥� 鈥� a far higher share than those who saw policy as too restrictive. (About three-fourths view current policy as 鈥渁bout right.鈥�)
One risk is the potential for higher inflation. Another is that opening monetary spigots, while aimed at supporting the 鈥渞eal economy鈥� of consumers and businesses, could potentially also fuel destabilizing price bubbles in assets like stocks.
鈥淭he rise in gold might be associated with people not being sure what currency to go into,鈥� Mr. Lachman says. 鈥淵ou used to think that the dollar was stable. That was the go-to place when times were difficult. But now you鈥檙e not sure.鈥�
The Fed鈥檚 dual mandate from Congress is to seek price stability and full employment in the U.S. economy. Both those goals are best achieved when a severe boom and bust, like the housing bubble and global financial crisis of the early 2000s, can be avoided. The Fed鈥檚 recent policy shift on inflation serves to affirm its commitment to supporting economic growth 鈥� better achieved when the risk of a damaging deflationary spiral can be taken off the table of public expectations.聽
Many economists concur.
鈥淭here is a risk of 鈥� a vicious circle in which it鈥檚 very hard to escape a low interest rate, low inflation, low growth environment,鈥� says Greg Daco, chief U.S. economist at Oxford Economics in New York. With short-term interest rates already near zero, 鈥渢hese tweaks to the monetary policy framework are aimed at avoiding falling permanently into that trap.鈥�
Around the world, central banks are largely operating in sync on that objective.
A one-paddle canoe?
But they could use some help in the form of more relief from governments to support unemployed workers, struggling businesses, and revenue-starved local and regional governments.聽
鈥淚f you鈥檙e in a canoe and only one person is paddling, the other person has to paddle,鈥� says William Spriggs, an economist at Howard University who also works for the AFL-CIO labor federation. In fact, he sees the new Fed stance on inflation in the United States as designed in part to encourage such action by Congress.
鈥淚t was necessary for the Fed to reassure everyone that there was space for a fiscal [government] response,鈥� without worry that the Fed would feel impelled to counterbalance such efforts by raising interest rates, Professor Spriggs says. 鈥淲hat the Fed is saying is, 鈥楴o. 鈥� We鈥檙e not doing that.鈥欌��
On Thursday, however, prospects for a stimulus deal before election day dimmed considerably as Republicans and Democrats remained far apart on the scale and scope of an emergency package.
Mr. Spriggs and other experts say the Fed鈥檚 shift is more than just a crisis response. It鈥檚 also a long-term change in central bankers鈥� outlook. In the current era of globalized labor markets and what some call a 鈥渟avings glut,鈥� inflation hasn鈥檛 been the menace it was in the 1970s.聽
The result may be that stimulative policies can stay in place longer than was considered appropriate in the past, redefining 鈥渇ull employment鈥� upward during economic expansions. While helpful across the job-market spectrum, this shift could especially expand opportunities for less-advantaged workers to build their careers, skills, and savings.
A more inclusive central bank聽
Chairman Powell was overt about this in his Aug. 27 speech. One passage in essence acknowledged the Fed should pay more attention to economic conditions for African Americans and others who haven鈥檛 shared equally in economic gains.
鈥淢aximum employment is a broad-based and inclusive goal,鈥� Mr. Powell said. 鈥淭his change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.鈥澛�
The shift is a win for American workers broadly, says Mr. Spriggs, a board member for a regional Fed effort on inclusive growth.聽
Despite the generally warm reception of the Fed鈥檚 policy adjustment, critics still have a list of concerns. In addition to inflation or asset bubbles, one question is whether the sheer scale of central bank intervention is sustainable.
The Bank of Japan, the European Central Bank, and the Fed now hold a stunning $21 trillion in bonds and other assets, largely purchased in efforts to support their economies. That figure has risen by about $6 trillion so far this year, and is up about $17 trillion since 2007.
Will those economies get healthy enough to sell those assets back to investors anytime soon?聽
Helen Popper, an economist at Santa Clara University in California puts in a word for patience rather than panic.聽
鈥淲hen they need to unwind these positions, they are going to have to pace it, right? But there鈥檚 nothing about it that says that they have to do it in any dramatic way,鈥� she says.聽
For now, central banks are justifiably less concerned about inflation than the risk of deflation 鈥� the scourge that eroded prices, wages, and business solvency in the Great Depression.
鈥淲e need to keep treating the wounds and give [the economy] a chance to heal,鈥� Professor Popper says. 鈥淚t鈥檚 important not to overdo it, but it鈥檚 also important not to get policy fatigue.鈥澛�
