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Shifting Fed Forecasts Fuel US Inflation Debate, Concerns Amid Pandemic Economy

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The Federal Reserve is now forecasting a higher rate of inflation for this year and the possibility of two interest rate hikes earlier than previously anticipated.

In March, the Fed predicted inflation would climb 2.4% in 2021 and estimated an initial rate hike in 2024. In June, those numbers jumped to 3.4% and 2023.

General economic uncertainty and the soaring prices of goods like used cars and lumber have provoked fear about a return to the kind of rapid run-up in prices seen during the inflationary spiral of the 1970s, when inflation rates reached a 13-year high.

The main tool the Federal Reserve has to stem inflation is interest-rate adjustment. Chair Jerome Powell said that while the central bank is keeping a close eye on inflation amid the nation's ongoing recovery from pandemic-induced economic fallout, it isn’t ready yet to employ such mitigating measures.

What is inflation, really? What causes it to fluctuate and what are the economic implications? How much should Americans worry about the state of inflation?

How does the central bank decide if and when to raise interest rates? What all is taken into consideration? What was the White House response to the Fed's updated projections?

Why are prices for certain commodities and services on the rise? Will the trend continue? How do labor-market expectations fit in?

What has been the historical impact of the rise and fall of inflation in the U.S., and how could its current trajectory impact consumers, businesses and the country's overall economic standing in years to come? When do economists expect the market to settle?

Guests:

  • Jay Shambaugh, professor of economics and international affairs and co-director of the Institute for International Economic Policy at George Washington University, and non-resident senior fellow in Economic Studies at the Brookings Institution
  • Julia Coronado, clinical associate professor in the Department of Finance at the University of Texas at Austin, president and founder of MacroPolicy Perspectives, and former Federal Reserve economist

"The Source" is a live call-in program airing Mondays through Thursdays from 12-1 p.m. Leave a message before the program at (210) 615-8982. During the live show, call 833-877-8255, email thesource@tpr.org or tweet @TPRSource.

*This interview was recorded on June 28, 2021.