– Modest Tightening Now Would Avoid Having to Move Aggressively Later, Kashjari and Logan Argue
By Steven K. Beckner
(MaceNews) – The three Federal Reserve bank presidents who voted against the Federal Open Market Committee’s Wednesday decision to leave short-term interest rates unchanged defended their actions Friday.
The three dissenters — Cleveland’s Beth Hammack, Minneapolis’s Neel Kashkari, and Dallas’s Lorie Logan – all argued in separate statements that the rate-setting FOMC needed to take more urgent action to counter “elevated” inflation, given that the economy and labor markets are in good shape and don’t need monetary stimulus.
An immediate modest rate hike would have warded off the potential need to tighten credit more aggressively later, Kashkari and Logan maintained.
With Kevin Warsh in the chair for the second meeting, the FOMC voted 9-3 to leave the federal funds rate in a target range of 3.5% to 3.75%, where it’s been since a 25 basis point December rate cut.
In its boiled down policy statement, the FOMC acknowledged that “inflation remains elevated relative to the Committee’s 2% goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy.”
Once again, the FOMC declared that it “will deliver price stability.”
Hammack, Kashkari and Logan voted “no” because they “preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting,” according to the statement.
Explaining themselves Friday, the three dissenters made similar arguments – essentially that the Fed cannot afford to keep delaying action to combat an inflation that has exceeded the Fed’s 2% target for more than five years, especially since the economy is strong enough to withstand some modest tightening.
The FOMC statement itself suggested as much, calling economic activity “solid” and noting that “the unemployment rate has changed little.”
In that environment, there is no reason to put off rate hikes, the three dissenters contended.
Hammack, who issued the first statement, said “Inflation has been too high for too long. In my view, now is the time for the FOMC to act to speed the return of PCE inflation to our 2% objective and deliver on our commitment to price stability for the American people.”
“The longer that high inflation persists, the more challenging and costly it can be to bring it back down,” she said.
Observing that “inflation has remained stubbornly above 2% for more than five years,” Hammack said she is “not confident it will return to our objective on its own.”
Although energy cost surges and other “supply-side factors,” have boosted inflation, she said she “see(s) inflationary pressures coming from the demand side of the economy, as well.” She cited business leaders in her 4th District who “describe pricing pressures as broadening rather than fading…”
“Given the stability of the labor market, with the unemployment rate near my estimate of maximum employment, I view high inflation as the more pressing problem,” Hammack wrote.
“A higher federal funds rate would help restrain economic activity and reduce inflationary pressures,” she concluded. “I preferred to move at our recent meeting because I did not see the current policy stance as appropriately restrictive.”
Kashkari, who also noted that inflation has exceeded 2% for for more than five years, agreed that “supply shocks” had pushed up prices, but said “the massive investment in data centers has also added a new demand element to the high inflation Americans are experiencing.”
While he “largely subscribe(s)” to the view that central banks should “look through” supply shocks and allow them to pass on their own, he said he “increasingly believe(s) that monetary policy does have an important role to play in addressing a series of successive supply shocks that might lead to entrenched higher inflation.” And monetary policy can restrain demand.
So, Kashkari argued the FOMC needs to get going with monetary tightening, though not aggressively.
“(T)o manage against the risk that high inflation could become entrenched, I would rather tighten policy incrementally as we gather more data on the path of inflation and employment,” he said. “If inflation remains elevated, in my view, a potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary.”
“On the other hand, if inflation durably fades, a strategy of small policy steps would allow the FOMC to slow or pause subsequent adjustments without unnecessary impact on the real economy,” Kashkari added.
Likewise, Logan maintained that “modest action in the near term would reduce the likelihood of needing to take sharper action later.”
She warned against downplaying or excusing away the long period of high inflation. “Even after accounting for productivity gains and temporary supply shocks, inflation appears to be trending toward the mid-2’s, not all the way to 2%, and the risks are to the upside.”
Noting that the FOMC’s policy framework “calls for a balanced approach to our Congressionally established price stability and maximum employment mandates,” Logan wrote, “To better balance the outlook and risks for the Fed’s dual mandate goals, I would have preferred to increase interest rates by one-quarter percentage point at this week’s meeting.”
Warsh, in his post-FOMC press conference, welcomed the dissents as representing “a good family fight.” He said all FOMC members agree on the need to reduce inflation and repeatedly said the Fed “will deliver.”
For now, he said the rise in bond yields was helping the Fed tighten financial conditions without the Fed having to raise the funds rate. He insisted the FOMC’s stand pat stance on Wednesday did not represent “inertia” and vowed it will act if needed.
Three FOMC dissents are unusual, but not unprecedented. There were also three dissents at the December meeting, when the FOMC concluded a series of rate cuts, But then the dissenters diverged, with one (Gov. Stephen Miran) preferring a larger 50 basis point rate cut) and two (Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid) wanting no rate change.