Federal Reserve officials face a ticking clock in their ability to ignore high inflation and are now navigating between their own senses of patience and risk, and a U.S. economy stymied by tangled supply chains, slow hiring and strong consumer demand, Reuters reported. The combination of supply bottlenecks and a surge in household incomes fueled by pandemic-related government aid pushed the personal consumption expenditures price index, a key measure of inflation, to a 30-year high on a year-on-year basis in August. Policymakers still largely expect the pace of price increases to ease without the Fed nudging the process by raising interest rates sooner and higher than expected. Yet that judgment now hinges on a race, in effect. Will disruptions, such as the 100-ship backup at the Los Angeles-Long Beach port complex in California, disappear before households run out of an estimated $2 trillion in excess savings accumulated during the pandemic? And will that happen before recent price hikes show up in public expectations about future inflation? The latter may already be starting. A Fed index of inflation expectations tracked by top officials at the U.S. central bank has risen for an unprecedented five straight quarters. At 2.06%, it is above the Fed's 2% target, and likely rising. Consumer expectations have jumped, too. The Conference Board reported on Tuesday that its one-year consumer inflation expectations survey for October hit 7.0%, the highest since July 2008. Bond markets, also anticipating more inflation, are pricing an earlier start and faster pace to Fed interest rate hikes. "Early on, patience was easy," Fed Governor Randal Quarles said last week. "The fundamental dilemma that we face ... is this: Demand, augmented by unprecedented fiscal stimulus, has been outstripping a temporarily disrupted supply." Yet the economy's "fundamental capacity" remains intact, and Fed officials want to keep interest rates low as long as possible to let employment rise.
