RDQ’s Ryding Says Fed May Allow Inflation to Rise Above 3%

March 7 (Bloomberg) -- The Federal Reserve may let inflation exceed 3 percent as it keeps the main interest rate low to boost growth, said John Ryding, a former Fed researcher who is chief economist at RDQ Economics LLC in New York.

“The Fed’s saying that they’re going to be quite tolerant” about rising prices, Ryding said today in a radio interview on “The Hays Advantage” with Kathleen Hays and Vonnie Quinn.

“They may dress it up in terms of they expect inflation to fall and they keep talking about that, but I think they would tolerate inflation for a while of up to 3 percent or maybe a little higher,” he said.

The Federal Open Market Committee estimated in January that inflation will be at or below its 2 percent goal for the next three years, according to the central tendency estimate. The FOMC’s inflation target benchmark, the personal consumption expenditures price index, rose 2.4 percent for the 12 months ending in January.

The Wall Street Journal reported today that the U.S. central bank is considering a program aimed at stimulating growth while restraining inflation. Under the plan, the Fed would print money to buy long-term Treasuries or mortgage bonds and tie up that money by borrowing it back for short periods at low rates, the newspaper said, citing people it didn’t identify.

A decision to begin so-called sterilized bond purchases may “calm” policy makers who are most concerned about maintaining stable prices, Ryding said.

“I don’t think it would appease them but if we have to go down that route then we’re addressing those inflation concerns,” he said.

Sterilized asset purchases probably aren’t on the Fed’s current agenda, Julia Coronado, chief economist for North America at BNP Paribas SA in New York, said on the program. The move may deter criticism from lawmakers should the Fed decide more stimulus is necessary, she said.

To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net Kathleen Hays in New York at khays4@bloomberg.net.

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net