By Michael S. Derby 

Federal Reserve Bank of St. Louis leader James Bullard said higher inflation is coming to the U.S. economy, but didn't indicate that would be a worrisome development.

The veteran central bank official said a host of forces were joining to put upward pressure on today's weak price growth, in a virtual appearance Friday. He didn't say how high he expects inflation to go and whether the shift would require a monetary policy response to keep the increase contained.

"You've got a more relaxed central bank, that's one thing. Less pre-emptive policy from the central bank. You've got huge fiscal deficits, which historically have been a catalyst for inflation. And you've got, you know, possibly bottleneck type pressures" tied to economic disruptions tied to the coronavirus pandemic, he said. All of that could add up to mounting price pressures, he said.

Mr. Bullard also said the economy is also likely to grow 30% in the third quarter from its second-quarter depths, while unemployment falls to 6.5% by December, from 8.4% today.

"All kinds of things are going on in a very turbulent time here as we're trying to react and recover from this huge shock that we got in early March, April," Mr. Bullard said. "So I actually think you may see more inflation than we had during the pre-pandemic era, where things were very quiet and inflation was very subdued."

Mr. Bullard's comments were his first since this week's rate-setting Federal Open Market Committee meeting. The central bank didn't change rates from their current near-zero setting, but it did adopt a new system to guide monetary policy expectations. The Fed said it wouldn't raise rates until it had achieved what it considers maximum sustainable job growth, with inflation modestly overshooting its 2% target.

The Fed's new system comes in a climate where it has never consistently achieved that 2% inflation target, and inflation has in fact weakened during the coronavirus crisis, booking an annualized reading of 1% in July.

In forecasts released after the Fed meeting, officials showed no concerns that inflation would surge as they predicted a long overhang from the pandemic and no rate rises through at least 2023. The Fed collectively expects inflation to only rise back to 2% in 2023, amid a slow decline in the unemployment rate that doesn't test the lows seen at the start of 2020, before the pandemic took hold in the U.S.

Mr. Bullard isn't currently a voting member of the FOMC. He has been optimistic about the economy's ability to rebound from the crisis, and said Friday he believes the nation can recover all that it has lost economically, even if the virus remains a threat, due to the adaptability of business in the face of adversity.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

September 18, 2020 14:03 ET (18:03 GMT)

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