Top officials at the Federal Reserve on Thursday pushed back on speculation that the US central bank will soon pause its aggressive monetary tightening campaign, emphasising instead the need for further interest rate increases.
In her first public remarks since becoming a governor on the Federal Open Market Committee, Lisa Cook described inflation as a “near- and long-term threat” and said it was “critical” for the Federal Reserve to “prevent an inflationary psychology from taking hold”.
“In our current economy, with a very strong labour market and inflation far above our goal, I believe a risk-management approach requires a strong focus on taming inflation,” she said at an event hosted by the Peterson Institute for International Economics, a Washington-based think-tank.
“Aside from the immediate effect of higher prices on households and businesses, the longer it persists and the more people come to expect it, the greater the risks of elevated inflation becoming entrenched,” she added.
Separately, another Fed governor Christopher Waller on Thursday said incoming data suggest inflation is “far from the FOMC’s goal and not likely to fall quickly”.
“Though there are additional data to come, in my view, we haven’t yet made meaningful progress on inflation and until that progress is both meaningful and persistent, I support continued rate increases, along with ongoing reductions in the Fed’s balance sheet,” he said at an event hosted by the University of Kentucky.
“We currently do not face a trade-off between our employment objective and our inflation objective, so monetary policy can and must be used aggressively to bring down inflation,” he added.
The officials’ comments come as financial markets have whipsawed in an effort to digest both gloomier growth prospects globally, but also emerging signs of stress. Some investors and economists have speculated the Fed will need to back off from its plans to tighten monetary policy as a result and either move far more slowly in the coming months or pause altogether.
The Fed is debating whether to deliver a fourth consecutive interest rate increase at its upcoming meeting in November, a move that would lift the federal funds rate to 3.75 per cent to 4 per cent. Most officials forecast the benchmark policy rate reaching 4.4 per cent by year-end and 4.6 per cent in early 2023.
While the November decision will hinge in part on incoming jobs data, due out on Friday, and the next inflation report set to be released next week, Fed officials have explicitly cautioned that the economic circumstances do not yet warrant the central bank pivoting from its ultra-aggressive approach.
Waller on Thursday said he does not expect his view of inflation, the labour market and the overall trajectory of the economy to be altered materially by the incoming data, and highlighted that “most policymakers will feel the same way”.
Also on Thursday, Neel Kashkari, president of the Minneapolis Fed, said the central bank was “quite a ways away” from halting its interest rate increase — a message also reiterated this week by the Atlanta Fed’s Raphael Bostic and Mary Daly of the central bank’s San Francisco branch.
Cook, who is the first black woman to serve as a Fed governor, on Thursday backed the central bank’s decision to “front-load” its rate rises — which she said has helped to more rapidly crimp demand. Restoring price stability would not only likely require “ongoing rate hikes”, she continued, but also keeping interest rates at a level that restrain the economy “for some time”.
During a discussion following her remarks, Cook was asked about liquidity in the market for US government debt, which traders have warned has been strained. The Treasury market, she said, is “functioning well” with “large volumes of trades being executed”.
Waller said he was “confused” by market speculation that the Fed would slow its rate rises or halt them earlier because of financial stability concerns, saying markets were “operating effectively”.
While Cook emphasised that the economic effects caused by changes in monetary policy works with “long and variable lags”, she said any policy adjustments should hinge on “whether and when we see inflation actually falling in the data, rather than just in forecasts”.
At a separate event on Thursday, Charles Evans, president of the Chicago Fed, said the “momentum” in core inflation, which strips out volatile items such as food and energy, is what is most concerning to the central bank.
Economists have warned that waiting until realised inflation falls would all but ensure the Fed overtightens and causes a recession — something chair Jay Powell recently said could not be ruled out.
Cook said: “Although most forecasts see considerable progress on inflation in coming years, it is important to consider whether inflation dynamics may have changed in a persistent way, making our forecasts even more uncertain.”
Source: Economy - ft.com
