The Fed’s role in containing inflation risks

Yahoo Finance’s Brian Cheung reports on CPI data and inflation tilting higher.

Video transcript

ALEXIS CHRISTOFOROUS: New inflation data out today showed consumer prices increasing at the fastest rate in 10 years. The question for the market is, is that enough to persuade the Federal Reserve to start raising interest rates to combat rising inflation? We've got our Fed correspondent Brian Cheung on the case. And he joins us now. And Brian, I know this is one data point, but could it actually move the needle for the Fed?

BRIAN CHEUNG: Well, the short answer, Alexis, is no. But let's walk you through that CPI figure again this morning. A lot of people have already digested it, but worth reminding everyone that the print was 0.8% month over month increase in prices. That was well above the Street's estimates of only 0.2%. If you look at it on a year over year basis, that meant that prices rose at 4.2% versus 3.6% expected.

And this is what the Fed is going to be watching. The consumer price index, when you strip out those volatile food and energy components, when you look at that measure of inflation, that was still up 3% year over year. And what's interesting is that if you look at a month over month change in that core CPI, it was actually 0.9%. And guys, by the way, that's the highest since April 1982, which means, OK, does that mean the Federal Reserve then sees the argument for pulling forward its pullback and accommodation? It's been buying $120 billion a month in assets, in addition to holding interest rates at near zero.

And we got our first hint to the answer of that from Federal Reserve vice chairman Richard Clarida, who made the remarks earlier this morning shortly after the report was released, saying, quote, "This is one data point, as was the labor market report. But over time, we'll be taking signal from this data. And it's going to be very important that any pressures to inflation that arise be transitory." So translation-- yes, it was indeed a surprise on this report. That's how he described it.

But a lot of the price pressures are because of measurement issues, like, for example, year over year comparisons. You're starting to compare April 2021 measurements to April 2020 measurements that were really the cratering point of prices in the midst of that pandemic. And then, of course, you also have those bottleneck issues with lumber and also other types of commodities. So a lot of very interesting factors at play here, but summary, Federal Reserve hasn't changed its thinking, despite those two data points that we got recently, Alexis.

KRISTIN MYERS: All right, so, Brian, I want to ask you-- because you recently sat down with the Cleveland Fed president, Loretta Mester. A great conversation that you had with her. I want to ask you about another data point. So we got inflation out today. We got the jobs report out just a couple of days ago, a hugely disappointing report. What did she have to say in how the Fed is looking at the labor market?

BRIAN CHEUNG: Yeah, well, as you mentioned, we had Loretta Mester, the Cleveland Fed president, in an exclusive here on Yahoo Finance yesterday. And she was saying something very similar to what we heard from San Francisco Fed president Mary Daley, also on Yahoo Finance on Monday, which is that we should expect to see volatility in these jobs reports through the recovery, which is a bit of a tonal change from what we had heard after the March jobs report, which you'll recall had one million job gains for that month, although it was revised down slightly after the fact.

But regardless, the Federal Reserve had said after March that it would like to see a string of those types of one million a month job gains. And of course, we didn't have a streak of even two months because April clocking in only at 266,000 on a not seasonally adjusted basis.

So the question is going to be, what do we see in future jobs reports? Is it going to be the 1 million that the Federal Reserve was aspiring for? Or is it going to be these ups and downs? And what we heard from Loretta Mester was that it might be those ups and downs. Those were the exact words that she used to describe it.

And that underscores how this recovery is moving so fast that it's really hard for Federal Reserve policymakers to be ahead of the ball and try to predict exactly where it's going to be, which means that the level of uncertainty when it comes to not just the Fed, but anyone else's economic forecasts, are going to be extremely noisy in the months to come, guys.

ALEXIS CHRISTOFOROUS: And did Mester talk at all about other upside risks to this economy outside of inflation and whether or not there is talk there within the Fed that their easy policy may actually cause some issues down the road?

BRIAN CHEUNG: Yeah, and the key word right there is upwards. We were talking about in our conversation, which, by the way, you can find the full transcript on our site on YahooFinance.com-- quick plug. But we were talking about asset valuations and whether or not easy money policy with the amount of money printing that the Federal Reserve has been doing is leading to higher asset pressures that could possibly pop at some point. Obviously, a lot of people on the outside in looking at the stock market, saying, how is this possible?

And I think that what we've heard from Federal Reserve officials is kind of a tone of caution, which is that, on one hand, upward asset valuation pressures-- that's how the Cleveland Fed president described it-- are certainly in place right now, but that they're not at levels that will be concerning from a financial stability standpoint. So nothing on the likes of 2008, for example, that could pop in the system.

Of course, that's their assessment right now. Who knows what the consequences of all this policy might be in the months or years to come? But at least for right now, Fed officials saying we're not quite worried about that. It's not an argument for us to want to pump the brakes on our easy policy just yet. We have to try to make sure we get that over 8 million figure in terms of job losses compared to pre-pandemic levels back in place before we start to worry about those things.

ALEXIS CHRISTOFOROUS: All right, Fed correspondent Brian Cheung, thanks, as always.