Rely on Active Management in Inflationary Uncertainty

Loretta Mester, president of the Cleveland Federal Reserve, has said that a new, more contagious strain could exacerbate supply chain issues that were just starting to finally recover, and drive workers to stay home, increasing labor shortages, reports the Financial Times. The global supply chain issues and worker shortages that have prompted wage increases have been the twin specters driving inflation to its current record highs.

“The fear of the virus is still one of the factors holding people back from re-entering the labor force,” Mester said. Workers who had previously left or lost their jobs in the midst of the pandemic would most likely continue to stay home in an environment of another highly contagious, dangerous variant.

This is continued commentary in support of Fed tapering of the bond stimulus, and an acknowledgement of potential impacts of a more dangerous variant than Delta, so far the most virulent strain to date. While much is still unknown about Omicron, for now it does appear to possibly be even more contagious than Delta was. It will take weeks before testing is completed to determine efficacy of current vaccinations, how severely it impacts people, and the rate of reinfection.

Speaking to the faster timeline for taper, Mester said, “We have to entertain the risk that those persistently high numbers of inflation could become more embedded. It’s really about giving us the optionality . . . to make moves on the interest rate path.”

For now, the Fed appears to be angling to give itself space and the ability to respond to a variety of potential economic futures in the coming months, and with so much still unknown, volatility and uncertainty are sure to continue.

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