The Federal Reserve’s vice chair, Richard H. Clarida, pushed back on concerns raised by two prominent economists — Lawrence H. Summers, the former Treasury secretary, and Olivier J. Blanchard, former chief economist at the International Monetary Fund — that big government spending risks of out-of-control inflation.
“They have both correctly pointed out that the U.S. has a lot of fiscal support this year,” Mr. Clarida said, speaking on an Institute of International Finance webcast. “Where I would disagree is whether or not that is primarily going to represent a long-term, persistent upward risk to inflation, and I don’t think so.”
Mr. Clarida said that there’s a lot of room for the economy to recover — some 9.5 million jobs are missing compared to before the pandemic — and that the effect of the government’s relief spending will diminish over time. He also pointed out that while there is pent-up demand on the part of spenders, there is also pent-up supply, because the service sector has been shut for months on end.
“At the Fed we get paid to be attentive and attuned to inflation risks, and we will be,” he said. But he noted that forecasters don’t see “undesirable upward pressure” on inflation over time.
Mr. Clarida did acknowledge that price gains are likely to move up over the next few months, but said that he expects most of that “to be transitory” and for inflation to return to “or perhaps run somewhat above” 2 percent in 2022 and 2023. But he emphasized that the Fed is now aiming for 2 percent annual price gains on average, so such a result would be welcome.
“This outcome would be entirely consistent with the new framework we adopted in August 2020,” he said.
The administration has ushered a $1.9 trillion relief package through Congress and into law, adding to a $900 billion relief package enacted in December 2020, prompting many economists to project faster growth this year. Mr. Clarida spoke positively about the outlook for the economy.
“This year the U.S. looks like it’s going to be a locomotive for the global economy,” Mr. Clarida said.
Now, the Biden administration is pulling together an up-to-$3 trillion infrastructure package. While Mr. Clarida declined to comment on specific legislation or proposals, he did say broadly that “infrastructure is needed, and the supply-side of the economy will be boosted if that money is well spent and targeted.”