St. Louis Fed’s Bullard Discusses “The Inflation Shock of 2021”

December 03, 2021

CLAYTON, Mo. – Federal Reserve Bank of St. Louis President James Bullard presented “The Inflation Shock of 2021” at a meeting of the Missouri Bankers Association on Friday.

Bullard told the association that there has been an unexpected inflation shock in the U.S. during 2021, and that U.S. monetary policy has so far remained very accommodative. He added that asset price inflation has been substantial as well.

He said that U.S. real gross domestic product (GDP) has fully recovered and that labor markets are quite strong and likely to get stronger. He also noted that pandemic risk remains.

“These considerations suggest, on balance, that the Federal Open Market Committee (FOMC) should remove monetary policy accommodation,” he said.

An Inflation Shock in 2021

Bullard explained that the inflation forecast in the December 2020 Summary of Economic Projections indicated that the median FOMC participant thought 2021 inflation would be 1.8% for both core and headline PCE inflation, which is below the FOMC’s 2% target. Measured from a year ago, headline PCE inflation is currently over 5% and core PCE inflation is over 4%—well in excess of the 2% target, he said. Furthermore, this is the highest inflation in 30 years for both measures, he added.

“Monetary policy has remained accommodative even in the face of the inflation shock. The recession ended about 19 months ago, but the FOMC’s policy settings are still largely the same as when the recession began,” he said. In particular, the Fed’s balance sheet is still growing, and the policy rate remains near zero, he pointed out.

U.S. Real GDP Has Fully Recovered

“Monetary policy this accommodative might be justified if the real economy had not yet recovered,” Bullard said. “However, real GDP has already passed the pre-pandemic peak and is slated to move considerably higher. In addition, many labor market measures indicate very tight labor market conditions.”

Bullard noted that the U.S. is currently in the expansion phase of the business cycle. “National income is higher than it was at the previous peak and is poised to grow at an above-trend rate,” he said.

The FOMC’s New Monetary Policy Framework

Turning to the new monetary policy framework, Bullard said a key aspect of it is the desire of the FOMC to allow inflation to run above the 2% target for some time to make up for past misses of the inflation target to the low side.

“It now appears that the FOMC will be able to achieve this result with an appropriate monetary policy over the next several years,” he said.

Pandemic Risk Remains

In discussing the pandemic risk, Bullard noted the arrival of the COVID-19 omicron variant.

“It is too soon to provide a meaningful assessment of the impact on the public health situation or on the economy in the U.S.,” he said.

Implications for Current Monetary Policy

Bullard pointed out that U.S. inflation has “surprised substantially to the upside” during 2021, in an environment where measures of real economic activity are “generally robust.” Monetary policy settings, however, largely remain as set during the recession, when inflation was below target and measures of real activity were very weak, he said.

“These considerations suggest that the FOMC at upcoming meetings may want to consider removing accommodation at a faster pace,” he said.

James Bullard served as president and CEO of the Federal Reserve Bank of St. Louis from April 1, 2008, to July 13, 2023. In this capacity, he oversaw the activities of the Eighth Federal Reserve District and was a participant on the FOMC.

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