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A top Federal Reserve official said it was “undeniable” that the slowdown in US inflation was a trend rather than a momentary blip, despite a recent string of economic data showing persistent pressure on some prices.
Speaking to the Financial Times, Austan Goolsbee, president of the Chicago Fed, denied that progress was stalling on getting inflation back to the US central bank’s 2 per cent target. He cautioned against tying forthcoming monetary policy decisions to a narrow set of data.
“There is a lot saying that inflation is trending down compared with what it has been and that’s what we want,” he said. “It’s undeniable this is a trend. It wasn’t a one-month blip . . . we have to hope and keep an eye out to make sure that continues.”
The latest inflation report showed that consumer prices rose more than expected in September, to 3.7 per cent year on year. A surprising uptick in housing-related costs, as well as those related to hotel rooms and recreation services, kept core inflation, which strips out volatile food and energy prices, firm as well. The report followed an unexpectedly large jump in monthly payrolls.
Together, the figures suggest that momentum in the world’s largest economy is still strong, intensifying the debate among Fed officials about whether they will need to raise their benchmark policy rate by one more quarter-point notch this year. The federal funds rate stands at a 22-year high of 5.25 per cent to 5.5 per cent, a level reached in July. Officials next meet at the end of the month.
Goolsbee, who is a voting member on the Federal Open Market Committee this year, acknowledged that the reversal in rental and other housing inflation after months of easing was a “negative surprise” meriting a “proper element of caution”. Economists and policymakers had expected those prices to continue to moderate, given data showed a slowdown in most markets. Goolsbee said it was something he would closely monitor to determine the speed at which inflation fell from here.
But he was much more sanguine about the jobs data, saying that large monthly gains while wage growth was slowing was most likely an indicator of improving labour supply rather than a cause for concern. In a recent interview with the FT, Treasury secretary Janet Yellen also subscribed to that view.
“One of the worst things you can do is tie this monetary policy decision to what did the last data show the last month. You want to take a broader view,” said Goolsbee, who stressed he had yet to make up his mind about a November rate rise.
However, he said, the Fed had been “rapidly approaching” a point where the policy debate was shifting away from how high to raise interest rates to how long they needed to be maintained at this level. Nothing in the data in the past six weeks had changed that.
Since the last meeting in September, at which officials signalled support for one more rate rise this year and half a percentage point fewer cuts in 2024 than previously estimated, US borrowing costs have risen sharply. At one point, the benchmark 10-year Treasury yield was at its highest level since 2007. The rout has eased in recent days as policymakers at the Fed have hinted that tighter financial conditions may offset the need for another rate rise.
Many, including hawkish governor Christopher Waller, have also reiterated that the central bank has the flexibility to maintain a more patient approach to future policy decisions, and can take time to assess incoming data to get a better grasp on the economy’s trajectory. This is something Goolsbee also endorsed.
“That’s what I call the ‘data-dog’ approach. Let’s just keep sniffing,” he said.
Complicating the two remaining decisions this year are external shocks, including a sharp escalation in tensions in the Middle East that has driven up oil prices and fanned significant uncertainty about the outlook for both global growth and inflation.
An expanding autoworkers strike as well as the renewed spectre of a US government shutdown next month pose additional risks.
Goolsbee, who maintained that the Fed could get inflation under control without substantial economic pain, said he was most concerned about disruptions such as these jeopardising that outcome. “Oil price shocks and external shocks have derailed soft landings that were easier than this one,” he said.
Source: Economy - ft.com
