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Fed Vice Chair: Fed can 'offset' runaway inflation if needed

Federal Reserve Vice Chair Richard Clarida said Tuesday that he is not expecting a scenario where an overheating economy leads to runaway inflation.

“The outlook for the economy in terms of economic activity is very, very positive,” Clarida told Yahoo Finance in an exclusive interview.

With the economy re-opening, inflation readings have already jumped. Earlier this month, the Consumer Price Index (CPI) showed consumer prices increasing at the fastest rates in over 10 years.

Some critics have bashed the Fed for keeping its policy this easy for this long, worrying that prices could continue to rise in a possible repeat of 1970s-era hyperinflation. Clarida admitted the CPI print was “a very unpleasant surprise.”

But Clarida said those inflationary pressures “will prove to be largely transitory,” echoing commentary from other Fed officials that have pointed to supply chain bottlenecks as examples of temporary dynamics at play.

[Read the full transcript of Yahoo Finance Live's interview with Fed Vice Chair Richard Clarida]

“It’s going to take some time to get a clearer sense of how supply and demand will balance,” Clarida said.

Still, the vice chairman acknowledged the “risk case” that inflationary pressures end up being more persistent than expected.

“We will recognize that and through our communication and our tools, I think we will be able to offset that in a way that would be supportive of maintaining the economic recovery,” Clarida said.

What’s next for QE

The vice chairman defended the Fed’s hold-the-line approach to monetary policy. Since the depths of the pandemic, the central bank has had short-term interest rates pinned to near-zero and absorbed about $120 billion in assets every month.

The Fed has said its first step to pulling back that support would be slowing the pace of those purchases, which cover U.S. Treasury bonds and agency mortgage-backed securities.

“There will come a time in upcoming meetings where we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases,” Clarida said. He added that the timing for those discussions will depend on how the data comes in.

For his part, Clarida said he expects GDP growth “somewhere north of 6%” or possibly 7% in 2021.

Many of Clarida’s colleagues within the Federal Reserve System similarly say they are not yet ready to begin pulling support. St. Louis Fed President James Bullard told Yahoo Finance on Monday that the economy is “not quite there yet,” although he added that “we will get there in the months ahead.”

But other Fed officials have begun articulating their eagerness to begin talking about tapering the central bank’s asset purchases.

Philadelphia Fed President Patrick Harker said Friday that he would like to begin talking about tapering “sooner rather than later.” Dallas Fed President Robert Kaplan has articulated a similar notion for weeks.

“Maybe taking the foot gently off the accelerator would be the wise thing to do here,” Kaplan said on May 20, as reported by Reuters.

The mixed views will set the stage for what could be an interesting policy-setting meeting, scheduled to take place June 15 and 16.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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