Inflation Considerations and the Monetary Policy Response Charles L. Evans

Evans President and Chief Executive Officer Federal Reserve Bank of Chicago 2021 Bank of Japan–Institute for Monetary and Economic Studies Conference, Adapting to the New Normal: Perspectives and Policy Challenges after the COVID-19 Pandemic May 25, 2021 _____________________________________ FEDERAL RESERVE BANK OF CHICAGO The views expressed today are my own and not necessarily those of the Feder. [...] 2 Inflation and developing resource gaps To set the stage, the FOMC has an average inflation target of 2 percent as measured by the Price Index for Personal Consumption Expenditures (PCE), which is shown in the left-hand panel of this chart. [...] The factors behind these increases are well known: the base effects of last year’s price declines dropping out of the 12-month calculation; the normalizing rebound of prices in sectors hard hit by the pandemic; and supply-side cost pressures associated with a fast- growing economy. [...] 4 Act on the unemployment rate under a few scenarios regarding how much and how quickly appropriations from the plan might be spent.3 Their results are shown in the right-hand panel of the slide, along with the February 2021 baseline CBO forecast, which did not include the fiscal package. [...] The largest and most persistent impact is in what they call the smoothing scenario—in which the unemployment rate falls somewhat below its pre-pandemic level of 3.5 percent for three consecutive quarters, starting in the fourth quarter of 2021.4 Resource pressures and inflation What are the consequences for inflation? Well, here you need a model that relates resource pressures to inflation.