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Opinion
Tim Duy

How the Fed Will Respond to the Coming Inflation Scare

The central bank is likely to view what will surely be signs of price shocks as transitory.

Federal Reserve Chair Jerome Powell has some tough decisions to make in 2021.

Federal Reserve Chair Jerome Powell has some tough decisions to make in 2021.

Photographer: Bloomberg

With a new fiscal package to support the U.S. economy through the winter and the prospect of households unleashing substantial pent-up demand in 2021, the set up for faster inflation is better than it has been for decades. But don’t expect the Federal Reserve to tighten monetary policy next year in response – even if inflation comes in higher than central bankers are forecasting.

The economy will benefit from a slew of substantial tailwinds in 2021 that can leverage on the rollout of Covid-19 vaccines. Widespread vaccination will spark consumer spending next year, fueled by pent-up demand and a massive surplus of saving. The newly announced $900 billion fiscal aid package is the icing on the cake as it will leave the economy on firmer footing from which to launch in the spring.