By Steven K. Beckner
(MaceNews) – Federal Reserve officials generally agree on the need to lower inflation, but they take divergent positions on what path monetary policy needs to take in the near term to achieve that, and on how quickly the Fed needs to take action.
There was considerable support for higher interest rates at the late July Federal Open Market Committee meeting, as minutes of the Federal Reserve’s policy body’s deliberations released Wednesday confirmed.
But not everyone is eager to raise rates – not, at least, without seeing more evidence that greater monetary policy restriction is needed to beat down inflation.
Economic data since the FOMC last met have brought hopeful signs on inflation, as well as signs of softening in the labor markets and in all-important consumer spending, seemingly making Fed officials a bit more hesitant about aggressive monetary tightening.
San Francisco Federal Reserve Bank President Mary Daly took a patient approach Thursday, saying she sees no need for the Fed to take “preemptive” measures to protect its anti-inflationary “credibility.”
Reputedly more hawkish St. Louis Fed President Alberto Musalem, who is on record as having backed a rate hike in late July, sounded somewhat less vociferous Thursday, saying he wants to to see more data before deciding whether to advocate a rate hike at the FOMC’s Sept. 15-16 meeting.
Boston Fed President Susan Collins, who was visiting New Hampshire Thursday, said a week ago that she would support a September rate hike if she doesn’t see more improvement on inflation.
The comments come three weeks after the FOMC kept the key federal funds rate unchanged in a 3.5-3.75% target range for a fifth straight meeting. And the officials were speaking just over a week before Fed Chairman Kevin Warsh gives an anxiously awaited keynote address at the Kansas City Federal Reserve Bank’s annual Jackson Hole, Wyoming Symposium.
Daly, like her colleagues, said “the Fed really has to focus on achieving its inflation target,” adding that, it is “missing its inflation goal by quite a bit.”
However, she made clear in a Bloomberg interview that she does not favor early or “preemptive” action to cool inflation, least of all to suit Wall Street.
There is a school of thought that the Fed has lost, or is losing, its “credibility” after more than five years of inflation exceeding its 2% target. Despite Warsh’s repeated pledge to “deliver price stability,” some say the bond market has been showing its doubt by pushing up yields across the spectrum.
But Daly countered that thinking.
“There’s a lot of discussion about our credibility here,” she said, but “I don’t see our credibility at risk.”
Daly said she’s also “hear(ing) a lot about” the need for “preemptive” rate hikes, but she said, “ I don’t see a lot evidence that that’s an urgent problem to solve.”
On the contrary, she said, “short term yields show that markets understand the Fed’s reaction function” and are comfortable with the Fed’s cur rent posture. She said the rise in longer term yields are a global issue.
So, Daly contended “we are still in a good place to watch the data.”
A day after Treasury Secretary Scott Bessent surprisingly announced a doubling of Treasury buybacks of long-term debt, she declined to judge the move, saying it is too “early” to judge the impact or whether it conflicts with the Fed’s own policies.
Musalem also seemed to take a more cautious approach than he did the week after the FOMC meeting.
Then, he made hard-nosed comments on the need for monetary tightening. “Given the “resilient” economy and the “stabilized” labor market, and given inflation “well above” the 2% target, he said “the balance of risks is tilted toward inflation remaining above target a year or more from now.”
“Against this backdrop, it is crucial that monetary policy put a meaningful restraint on underlying inflation, rather than tolerating somewhat higher inflation today to pursue productivity growth tomorrow,” Musalem said earlier this month.
Seemingly contradicting Warsh’s contention that faster productivity growth will restrain price pressures, Musalem said, “(I)n my view, setting monetary policy easier than conditions would otherwise warrant in pursuit of higher growth would be a mistake. The size of the eventual productivity gains is highly uncertain, and the argument in favor of easier policy takes for granted the credibility of monetary policy.”
On Thursday, by contrast, he told CNBC he “want(s) to maintain an open mind” going into the mid-September meeting, adding that whether or not the FOMC raises rates will depend on the data that comes in between now and Sept. 15.
“My sense is that monetary policy is neutral or accommodative,” Musalem said. “When I look at the real policy rate, it is below where the committee believes the neutral long-run rate ought to be. Our policy rate, in real terms, is also below market interest rates.”
Overall financial conditions are also “pretty accommodative,” he added.
Speaking in an ostensibly gradualistic mode, Musalem said inflation needs to be brought down to 2% “over the next 18 months.” And he said “earlier, more gradual interest rate increases are preferable, better, less disruptive than later, potentially larger, potentially more abrupt increases.”
Collins has also positioned herself as a potential rate hiker. “I do see the possibility that economic conditions in the coming months will require tighter policy, and I would be prepared to raise rates in that context,” she told the Financial Times a week ago.
The July 28-29 FOMC minutes showed substantial support for rate hikes, going beyond the three Federal Reserve Bank presidents (Cleveland’s Beth Hammack; Minneapolis’s Neel Kashkari and Dallas’s Lorie Logan) who dissented in favor of an immediate 25 basis point rate hike on July 29.
But, with inflation concerns running high at the time, other non-voting FOMC participants also leaned strongly toward higher rates, as the minutes make clear.
“Several participants favored an increase of 25 basis points in the target range at this meeting,” the minutes report. “These participants remarked that price pressures appeared broad based and judged that the Committee should adopt a more restrictive policy stance to meet its commitment to achieving its price-stability and maximum-employment goals on a sustained basis.”
Aside from those favoring immediate rate hikes, the minutes suggest that there were others who were on the cusp of doing so.
“Many participants assessed that policy tightening would likely be necessary if inflation did not decline,” the minutes say. “Some participants commented that financial conditions might not currently be sufficiently restrictive to facilitate a return of inflation to 2%.”
“Various participants suggested that financial conditions had tightened over the intermeeting period and that this development was partly a reflection of strong economic growth and market expectations that the Committee would adopt a more restrictive policy stance before long,” the minutes continue. “ A few of the participants who favored raising the target range for the federal funds rate at this meeting judged that doing so would likely help forestall the need for a steeper and potentially more costly sequence of tightening moves at a later stage.”
In the days and weeks following the last FOMC meeting, a number of Fed officials made explicit their support for rate hikes, if not right away then conditionally.
Kansas City Fed President Jeffrey Schmid, for one, bluntly declared that “bringing inflation down to the Fed’s 2% objective will require tighter policy.” Musalem wasn’t far behind.
Other officials, who voted to stay on hold July 29, have indicated a willingness to tighten monetary policy before long if they don’t see more progress against inflation.
Fed Governor Lisa Cook, for instance, voted to hold rates steady, but served notice that she’s ready to raise them “if (she does) not see signs of continued disinflation soon.” Philadelphia Fed President Anna Paulson, who also voted to keep the funds rate unchanged, warned that if inflation remains “stubbornly elevated,” that would show that “more restrictive policy is needed.”