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Chief economist update: Patience is the word

The US economy is not out of the woods yet and therefore, worrywarts need not be concerned over rising inflation - that would prompt the Fed taper policy accommodation.

"Participants observed that the economy was far from achieving the committee's broad-based and inclusive goal of maximum employment and that even with a brisk pace of improvement in the labor market, achieving this goal would take some time," said the US Federal Reserve in it's most recent minutes.

While the US unemployment rate has fallen from the record high 14.8% recorded in April 2020 to 6.3% by January this year, it's still way above the 50-year low 3.5% that prevailed before the COVID-19 pandemic and even then, US inflation measures barely reached the Fed's 2% inflation target.

Here are the annual inflation averages for 2019:

Headline CPI inflation, down to 1.81% from 2018's average of 2.43%; Core CPI inflation, up from 2.14% to 2.19%; Core PCE price inflation, down to 1.7% from 2.0%; and the Fed's favoured inflation measure, the headline PCE price inflation went down from an average rate of 2.1% in 2018 to 1.5% in 2019 before clocking 1.3% in the year to December 2020.

Then again, the minutes show the FOMC acknowledging rising inflation:

"In the relatively near term, a number of participants suggested that there could be increases in the prices of some goods whose production has been subject to supply chain constraints, or soon could be; others anticipated that a possibly abrupt return to normal levels of activity could result in one-time increases in certain prices."

"Some participants further observed that 12-month PCE inflation was likely to move somewhat above 2 percent for a brief period in the spring as the unusually low monthly observations from last spring roll out of the 12-month calculation".

"Many participants stressed the importance of distinguishing between such one-time changes in relative prices and changes in the underlying trend for inflation, noting that changes in relative prices could temporarily raise measured inflation but would be unlikely to have a lasting effect".

As such, the FOMC remains committed to maintaining monetary policy accommodation until it achieves its goals of "maximum employment and inflation at the rate of 2% over the long run.

With inflation running persistently below this longer-run goal, the Fed would aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%.

In the words of US Fed Chairman Jerome Powell: "We're going to be patient...We'll seek inflation moderately above 2% for some time...The way to achieve credibility on that is to actually do it. And so that's what we're planning on doing".

Read our full COVID-19 news coverage and analysis here.

Read more: FOMCJerome PowellUS Federal Reserve
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