Gold is up. Dollar is down. Is inflation back on the worry list?

The whiff of inflation is in the air.

As improbable as it sounds in this low-inflation era, some signs point to a future period of rapid rises in consumer prices.

One is the price of gold. Long seen as a hedge against runaway prices, the yellow metal is trading within 5% of its all-time high. Billionaire investor Warren Buffett, who in the past has downplayed the precious metal, recently bought shares in a gold-mining company.

Another signal is the U.S. dollar. While still viewed by many as a haven from financial storms, its value has been sagging versus other major currencies in recent months. And Rochelle Jones, a young worker and student living near Washington is seeking alternatives to the dollar as a safeguard of her own financial future. Already a buyer of cryptocurrency before the coronavirus pandemic, she’s now buying investments in gold as well.

What’s triggered these concerns is America’s central bank, the U.S. Federal Reserve. It has won widespread praise for its recent moves to stave off a pandemic-led recession with echoes of the Great Depression of the 1930s. In so doing, however, some analysts worry that it is setting the stage in the long term for the opposite problem: a high-inflation era like the 1970s.

“I think they’ve done a great job in saving us from a depression,” says Desmond Lachman, a monetary policy expert at the conservative American Enterprise Institute in Washington. But, “I think that that is inviting trouble down the road.”

His specific criticism: a subtle policy change last month, where Federal Reserve Chairman Jerome Powell said the bank would be more tolerant than in the past of inflation during economic expansions.

Pumping the accelerator

As the central bank to the world’s largest economy, the Fed acts as a kind of chauffeur. If the economy is growing too slowly, it pushes down the accelerator by lowering official interest rates. Reducing the cost of borrowing typically causes businesses and consumers to take on more debt and spend more, which boosts the economy. By contrast, if the economy is growing too fast, and prices look to skyrocket because there’s too much demand for goods and services, the Fed eases off the gas by raising interest rates.

For now, America’s most widely watched inflation gauge, the consumer price index, shows little momentum. In July, the index showed average prices for goods and services rose only 1% from a year before. Pressure on consumer prices is similarly minimal in other industrialized nations. 

Yet both now and before the pandemic, at least a fifth of U.S. forecasters saw monetary policy as “too stimulative” – a far higher share than those who saw policy as too restrictive. (About three-fourths view current policy as “about right.”)

One risk is the potential for higher inflation. Another is that opening monetary spigots, while aimed at supporting the “real economy” of consumers and businesses, could potentially also fuel destabilizing price bubbles in assets like stocks.

“The rise in gold might be associated with people not being sure what currency to go into,” Mr. Lachman says. “You used to think that the dollar was stable. That was the go-to place when times were difficult. But now you’re not sure.”

The Fed’s dual mandate from Congress is to seek price stability and full employment in the U.S. economy. Both those goals are best achieved when a severe boom and bust, like the housing bubble and global financial crisis of the early 2000s, can be avoided. The Fed’s recent policy shift on inflation serves to affirm its commitment to supporting economic growth – better achieved when the risk of a damaging deflationary spiral can be taken off the table of public expectations. 

Many economists concur.

“There is a risk of … a vicious circle in which it’s very hard to escape a low interest rate, low inflation, low growth environment,” says Greg Daco, chief U.S. economist at Oxford Economics in New York. With short-term interest rates already near zero, “these tweaks to the monetary policy framework are aimed at avoiding falling permanently into that trap.”

Around the world, central banks are largely operating in sync on that objective.

A one-paddle canoe?

But they could use some help in the form of more relief from governments to support unemployed workers, struggling businesses, and revenue-starved local and regional governments. 

“If you’re in a canoe and only one person is paddling, the other person has to paddle,” says William Spriggs, an economist at Howard University who also works for the AFL-CIO labor federation. In fact, he sees the new Fed stance on inflation in the United States as designed in part to encourage such action by Congress.

“It was necessary for the Fed to reassure everyone that there was space for a fiscal [government] response,” without worry that the Fed would feel impelled to counterbalance such efforts by raising interest rates, Professor Spriggs says. “What the Fed is saying is, ‘No. … We’re not doing that.’”

On Thursday, however, prospects for a stimulus deal before election day dimmed considerably as Republicans and Democrats remained far apart on the scale and scope of an emergency package.

Mr. Spriggs and other experts say the Fed’s shift is more than just a crisis response. It’s also a long-term change in central bankers’ outlook. In the current era of globalized labor markets and what some call a “savings glut,” inflation hasn’t been the menace it was in the 1970s. 

The result may be that stimulative policies can stay in place longer than was considered appropriate in the past, redefining “full employment” upward during economic expansions. While helpful across the job-market spectrum, this shift could especially expand opportunities for less-advantaged workers to build their careers, skills, and savings.

A more inclusive central bank 

Chairman Powell was overt about this in his Aug. 27 speech. One passage in essence acknowledged the Fed should pay more attention to economic conditions for African Americans and others who haven’t shared equally in economic gains.

“Maximum employment is a broad-based and inclusive goal,” Mr. Powell said. “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.” 

The shift is a win for American workers broadly, says Mr. Spriggs, a board member for a regional Fed effort on inclusive growth. 

Despite the generally warm reception of the Fed’s policy adjustment, critics still have a list of concerns. In addition to inflation or asset bubbles, one question is whether the sheer scale of central bank intervention is sustainable.

The Bank of Japan, the European Central Bank, and the Fed now hold a stunning $21 trillion in bonds and other assets, largely purchased in efforts to support their economies. That figure has risen by about $6 trillion so far this year, and is up about $17 trillion since 2007.

Will those economies get healthy enough to sell those assets back to investors anytime soon? 

Helen Popper, an economist at Santa Clara University in California puts in a word for patience rather than panic. 

“When they need to unwind these positions, they are going to have to pace it, right? But there’s nothing about it that says that they have to do it in any dramatic way,” she says. 

For now, central banks are justifiably less concerned about inflation than the risk of deflation – the scourge that eroded prices, wages, and business solvency in the Great Depression.

“We need to keep treating the wounds and give [the economy] a chance to heal,” Professor Popper says. “It’s important not to overdo it, but it’s also important not to get policy fatigue.”