Inflation Making Fed Officials Increasingly Prone To Keep Funds Rate As Is, If Not Higher

– Schmid: Inflation ‘Most Pressing Risk To The Economy’

– Hammack: FOMC Must Make ‘Tough Tradeoffs” to Guarantee Low Inflation

By Steven K. Beckner

(MaceNews) – With the war against Iran worsening price pressures in the United States, Federal Reserve officials are not only leaning toward keeping monetary policy on hold indefinitely, they seem increasingly willing to entertain the idea that interest rate may have to be increased at some point.

It’s all but a foregone conclusion that the Fed’s policymaking Federal Open Market Committee will leave the federal funds rate unchanged at its June 16-17 meeting, the first to be chaired by newly confirmed Chairman Kevin Warsh. More at issue will be whether the FOMC drops the easing bias it has had in place since its last rate cut on Dec. 10.

With the Iran war still pushing up oil prices and in turn gasoline and other prices, rate cuts are the last thing on most officials’ minds currently.

Typical was Kansas City Federal Reserve Bank President Schmid’s assertion Thursday morning: “I see continued inflation as the most pressing risk to the economy.”

Cleveland Fed President Beth Hammack, one of three presidents who dissented against keeping the easing bias late last month, said Thursday that the Fed may need to make “tough trade-offs of short-term economic weakness in exchange for a future with lower inflation and stronger growth.”

Other Fed officials expressed similar sentiments earlier in the week.

Boston Fed President Susan Collins said Wednesday that monetary policy is “well-positioned” for now, but said scenarios could develop in which “some tightening” might be needed. At the very least, she said rates probably need to stay where they are “for some time.”

Minneapolis Fed President Neel Kashkari, who also dissented against keeping the easing bias, said Wednesday that the Iran war has “has really upended the inflation outlook,” and he said the recent resurgence of inflation has undermined the “confidence” he had before the war that inflation was headed back to the Fed’s 2% target.

Without even being asked Tuesday, Chicago Fed President Austan Goolsbee made a point of emphasizing that only one side of the Fed’s dual mandate – “price stability” – has “gone wrong”. And he said can only cut rates when it gets inflation down.

Atlanta Fed Interim President Cheryl Venable advocated a “wait-and-see” posture Tuesday, saying the Fed should not “risk stoking further inflation” by loosening policy, but also should not “upset” labor markets by tightening.

The officials spoke as discouraging inflation news continued to roll in, while oil remained under upward pressure. The Labor Department reported that the Consumer Price Index rose 0.6% in April, leaving the CPI up 3.8% from a year ago – highest in three years. Excluding energy and food, the “core CPI” was up 2.8%. Even more alarming, the Producer Price Index jumped 1.4% last month or 6% year-over-year. The core PPI was up 5.2%.

At its last meeting, April 28-29, the FOMC left the funds rate in a target range of 3.5% to 3.75% on April 29. It also left unchanged its “forward guidance,” which again stated, “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”

By referring to “additional adjustments,” as it had following the last of three rate cuts on Dec. 10, the FOMC leaned toward a resumption of rate cuts at some point. But after holding the funds rate steady for three straight meetings, Kashkari, Hammack and Dallas Fed President Lorie Logan dissented in favor of dropping that “easing bias” on April 29, and Powell strongly hinted the FOMC could move to more “neutral” or symmetrical forward guidance before long – perhaps at the next meeting June 16-17.

In his last post-FOMC press conference, Powell said “a majority of us didn’t feel like we needed to send a signal on that right now,” but added, “maybe it will come to that. And the reason is because, you know, we’re kind of waiting to see what happens with events in the Middle East and what are the implications of those events for the U.S. economy.”

Powell said “the center is moving” away from the easing bias and added, “of course we will move to a hiking bias if we want a hike. And we’ll move to a neutral bias before that.”

Whether Warsh will support moving from an easing bias to “neutral” forward guidance could become an early test of his leadership.

Officials steered clear of that particular issue this week, but they all downplayed risks to growth and employment and put much heavier emphasis on the need to fight inflation.

Schmid, for instance, stressed the inflation threat in Thursday morning remarks, while speaking almost glowingly of economic conditions – implying that the economy does not need more monetary stimulus at this time.

“Though the U.S. economy currently faces a number of challenges, it has also shown remarkable resilience,” he told a banking conference in Kansas City.

Schmid acknowledged that “geopolitical developments continue to create uncertainty” and said “higher oil prices still drain household spending power and increase costs for businesses.”

“Yet despite these headwinds, economic fundamentals in the U.S. and in the Tenth District remain sound,” he continued. “Growth is positive, with economic output expanding at a modest but steady pace so far this year. Unemployment remains relatively low by historical standards, and the labor market is functioning effectively – albeit in an unusual low-hire/low-fire environment.” Consumer spending is driving growth, he noted.

“However, I see continued inflation as the most pressing risk to the economy,” Schmid said. “While inflation has moderated significantly from its peak, in my discussions with business leaders across the Tenth District, it is clear that it is still too high.”

Much the same message was delivered earlier in the week by other Fed officials.

Kashkari, an FOMC voter, was, was blunt in a Wednesday visit to ​St. Paul, ​Minnesota. “Right now inflation is too high. It’s been above our target now for more than five years.”

“Before the Iran war started, I had some confidence,” he continued. “We made a lot of progress bringing inflation back down. It wasn’t all the way back down yet, but I had confidence it was heading in the right direction.”

But Kashkari added that “the Iran conflict and the shock wave of oil prices around the world, and not just oil prices – fertilizer prices, other related commodities – has really upended the inflation outlook. And now there’s just a huge question mark of how long is the Strait of Hormuz going to be closed, because that is going to have a big effect on what is going to be the path forward for inflation. So we just don’t really know right now.”

“We are dead serious about getting inflation back down to our 2% target,” he said. “We take this as seriously as we take anything.”

“What’s been hard we keep getting hit with these supply shocks,” Kashkari went on. “We try to get ahead of the wave, then we get hit by another one … . But know that we’re committed to getting inflation back down to target in a reasonable period of time.”

Collins explicitly opened the door to rate hikes in her own Wednesday remarks to the Boston Economics Club.

She said “the range of possible outcomes is wide, with risks to both the employment and inflation sides of our mandate,” but  “of particular concern is the possibility of a prolonged Middle East conflict that gives rise to more challenging policy trade-offs.”

“And while it is not in my most likely outlook, I could envision a scenario in which some policy tightening is needed to ensure that inflation returns durably to 2% in a timely manner,” Collins added.

“At the moment,” she said she “sees the stance of monetary policy as well positioned to adjust to the evolving outlook and balance of risks.”

Collins held out little hope for a resumption of rate cuts. “I believe it will likely be important to maintain the current slightly restrictive monetary policy stance for some time. More than five years of above-target inflation has reduced my patience for ‘looking through’ another supply shock. And it puts a spotlight on inflation expectations remaining anchored.”

Goolsbee, who will return to the FOMC voting ranks next year, was also blunt about the monetary policy implications of the recent re-acceleration of inflation in Tuesday comments.

“I would like us at the Fed …. to be cognizant that the job market is basically stable, and inflation is going up,” he told the Greater Rockford, Illinois Chamber of Commerce.

“So we’re not, at this moment, in a difficult balancing act between the two sides of the mandate,” he continued in responding to a non-policy question. “One side of the mandate is going wrong, and the other side is not going wrong. So in the short-run I want us to be cognizant of that.”

“I remain optimistic, and I was before the inflation started going up, that rates can come down still a fair amount, but we’ve got to see progress on inflation, and if it were up to me we would kind of adopt that mindset,” he added.

Goolsbee recalled that the Fed “was making progress (on inflation), then we stalled out around 3%. and stopped making progress …. . We leveled out.”

He said he had been hopeful that the tariff impact on inflation “would not last,” but then the oil price spike hit and drove inflation even higher.

Now, Goolsbee went on, “not only are we not making progress it’s going the wrong way” and “not just in oil-related things.” Referring to the April CPI report, he said “the unexpectedly disappointing part was services.”

“That‘s the part that I’m nervous about,” he elaborated. “I want to see that at least stop growing and go back down,” he said. “It .can’t just be from oil prices, or tariffs … . We need to keep an eye on that.”

Venable, who is serving as the Atlanta Fed’s interim president until a successor for retired Raphael Bostic is found, also tilted heavily toward keeping rates where they are, if not higher.

Saying that the FOMC acted “appropriately” in leaving the funds rate at a “mildly restrictive to neutral” level, she saw no reason to move away from that stance.

“With inflation still well above our target, and renewed price pressures brewing from a historic disruption in global oil supplies, the time is not right to loosen policy and risk stoking further inflation,” Venable wrote in an essay published by the Atlanta Fed. “Nor is it clear that now is the time to react forcefully to these new inflationary pressures, as doing so could upset the unusual balance in today’s labor markets.”

“Therefore, I think the optimal policy approach in the face of risks to both sides of the dual mandate is to wait and see,” she added.

Current Federal Reserve Bank presidents and governors are bracing for the imminent arrival of Warsh, who was confirmed Thursday by the U.S. Senate to succeed Powell as chairman.

Though some sitting Fed policymakers served with Warsh when he was a governor from 2006 to 2011, he arrives with new ideas about monetary policy, the Fed balance sheet and Fed operations that may make some of them uncomfortable – not the least of them Powell himself, who plans to stay on the Board of Governor after his term as chairman expires on May 15.

In particular, Warsh was outspoken in favor of lower interest rates, at least before the latest upsurge in war-related inflation, and he is seen in some quarters as a Trump puppet who will undermine the Fed’s independence. Warsh denied he will be Trump’s “sock puppet” in testimony before the Senate Banking Committee.

Addressing these issues Wednesday, Kashkari said, “The chair of the Federal Reserve has a lot of influence. He sets the agenda, the topics we’re going to talk about, what kind of topics to consider in our deliberations.”

“But he’s just one vote,” he continued. “He has to persuade his or her colleagues.”

Kashkari said the FOMC’s decisions are “analytically driven; we try to get it right. And the person with the best idea is ultimately going to be effective..no matter who the chair is, he’s going to have to bring the committee along.”

In the run-up to the Warsh confirmation, as President Trump demanded lower interest rates and threatened criminal prosecution of Powell, Fed officials mounted a strong defense of the Fed’s “independence.”

Hammack opened a conference on central bank independence Thursday by saying “an independent and accountable Federal Reserve is essential for policymaking.’

“Monetary policy independence is important for achieving our dual mandate goals of maximum employment and price stability,” she said. “It allows FOMC members to make decisions based on incoming data and the evolving outlook, including our understanding of how businesses and communities are experiencing the economy.”

Hammack observed that “reducing inflation often entails tough trade-offs of short-term economic weakness in exchange for a future with lower inflation and stronger growth.”

“As policymakers we try to balance our dual mandate goals of price stability and maximum employment so that the American public can benefit from a strong and resilient economy,” she added.