Says John Berry to -- let me think -- nearly everyone, that would be a big no, at least when it comes to parsing what all the recent Fedspeak really means. From his Bloomberg column today:
Every time a Federal Reserve official says that U.S. inflation in recent months is outside the "comfort zone,'' investors sell assets on the grounds rates are headed higher, perhaps much higher.
The investors ignore the fact that the officials also say pointedly that they expect economic growth to slow and inflation to subside later this year. None of the officials, from Fed Chairman Ben S. Bernanke on down, have indicated they believe a new inflationary spiral has begun.
To the contrary, many of them have explicitly said the opposite.
Need an example? No problem.
For example, on June 12, Sandra Pianalto, president of the Cleveland Federal Reserve Bank, said in a speech in Orlando, Florida, that core consumer prices have increased ``at an annualized rate of more than 3 percent during the past three months. This inflation picture, if sustained, exceeds my comfort level.''
That part of Pianalto's remarks was one reason cited for a sharp drop in stock prices that day.
Few paid much attention to other parts of her speech that suggested strongly that she expects inflation to ease without much more action by the Fed. The current Fed target of 5 percent for the overnight lending rate is ``near a point that is consistent with a gradual improvement in the inflation outlook,'' Pianalto said.
"I expect a flattening out of energy prices, a cooling housing market, continued strong productivity growth, and a moderation in the overall pace of economic activity,'' she added.
And Berry demonstrates he is down with the blog-hood:
Economist J. Bradford DeLong of the University of California at Berkeley posted a video commentary about inflation on his Web site June 12. In it he noted that it is the Fed's job "to worry about inflation, and to say it stands ready to boost interest rates substantially should any inflationary spiral appear to start taking hold.''
With wage increases so subdued, DeLong said, the odds are "that there will be no significant uptick in inflation and no significant increases in interest rates from now forward to the end of the business cycle.''
Would that the markets could accept that quite reasonable forecast.
Whatever forecast markets are accepting, it seems to be having the desired effect. From Monday's Wall Street Journal (page A2 of the print edition):
Inflation expectations have become increasingly important to monetary policy in recent years. When people anticipate a rising inflation rate, the prevailing theory goes, they are likely to behave in ways that will bring about higher prices. If workers anticipate a robust inflation rate in a year's time, they will be more likely to push for higher wages now. If businesses expect higher inflation, they will be more likely to increase prices sooner.
Preventing this kind of inflationary spiral is what Fed Chairman Ben Bernanke had in mind last week when he said the central bank will be "vigilant" in combating the recent upward trend in prices.
I added the emphasis. The article continues:
Another measure of expectations comes from the minute-to-minute trading in the bond market, where investors can choose between ordinary Treasury securities, which pay a fixed interest rate, and Treasury Inflation-Protected Securities, which guarantee a return above the prevailing inflation rate. Comparing the yields on the two securities gives one measure of how much investors think prices are expected to climb. The wider the spread, the higher the expected inflation rate...
In a development that surely pleased Mr. Bernanke and his colleagues, the tough talk had the desired effect. The spread between standard and inflation-indexed Treasury bonds retreated to below 2.5 percentage points last week, a victory, perhaps only temporary, in the Fed's battle to "anchor" inflation expectations
There are, of course, two key questions raised by this observation. First, are those improvements a result of John Berry's and Brad DeLong's "reasonable forecast" or a result of, and contingent upon, the belief that more rate hikes are a'coming. Second, will those improvements survive this week's inflation statistics.
UPDATE: Mark Thoma suggests expectations themselves work against a pause, even if their heart of hearts policymakers would prefer a pause. Stumbling and Mumbling questions whether this is a sensible way to run monetary policy.
We'll know the answer to that second question real soon.