– Goolsbee: Getting Inflation Down to 2% Target ‘Won’t Be Painless’
– Barkin: Inflation ‘Troublemaker’ Will Need More Than One ‘Talking-To’
– Paulson: ‘Recalibration’ Brought FFR ‘Closer’ But More Hikes Likely Needed
– Williams: ‘Reasonable’ To Expect More Fed Tightening
– Collins: Upside Inflation Risks Worsening; Need ‘More Restrictive’ Stance
By Steven K. Beckner
(MaceNews) – In announcing the Federal Reserve’s first interest rate hike in three years last week, Chair Kevin Warsh expressed hope that the Fed can tighten monetary policy without unduly negative impacts on the economy or labor market, but that’s not the way some Fed officials see it.
“Pain” is coming in the sometimes not-so-subtle view of some Fed officials who have opined since the Fed’s policymaking Federal Open Market Committee raised the federal funds rate by 25 basis points to a target range of 3.75% to 4.0% last Wednesday.
The only question is how much more monetary tightening, and potentially how much “pain,” the Fed has in store for the economy and financial markets.
Numerous officials have indicated last week’s moderate move will not prove to have been a one-off. No one knows for sure how much more “pain” is coming, but officials have left little doubt the FOMC is not finished,
New York Federal Reserve Bank President John Williams said Thursday morning “it’s likely that another rate hike may be appropriate by the end of the year. That seems to me a reasonable way of thinking about it.”
“But we have to see,” the FOMC vice chair said in London at a conference sponsored by the National Institute of Economic and Social Research, “We’re going to collect the data and do what we did between July and September.”
One more 25 basis point rate hike is what FOMC participants projected in their revised quarterly Summary of Economic Projections. That would take the funds rate to a median 4.1% (a range of 4.0% to 4.25%) by the end of this year, where officials anticipate it staying through 2027.
But financial markets are looking for more tightening than that, doubtful that one or two modest moves will do the job of putting inflation on a convincing downward trajectory to the Fed’s 2% target. And some Fed officials are explicit in warning that the central bank’s pledge to “deliver price stability” will come with a certain amount of “pain.”
Chicago Federal Reserve Bank President Austan Goolsbee was quite blunt about it on Monday, warning that cooling demand in the economy to reduce inflation “won’t be painless.” No, he said, monetary policy has entered into a “painful tradeoff.”
Other Fed officials have served notice that more rate hikes will be necessary, perhaps more than projected in the SEP “dot plot.”
Philadelphia Fed President Anna Paulson said Thursday the FOMC’s 25 basis point “recalibration brings policy closer” to where it needs to be to reduce inflation, but said “some modest further tightening may be warranted.” If more than “modest” tightening is needed, the FOMC voter implied she would back it.
Other officials have spoken in a similar vein.
Likening inflation to an adolescent “troublemaker,” Richmond Fed President Tom Barkin said Tuesday that “one “talking-to” might not be enough.” He said “it will take time” for supply-side price pressures to recede.
Boston Fed President Susan Collins said Tuesday that “upside risks to inflation have increased” and called for “a somewhat more restrictive” monetary stance.
Gov. Michael Barr, after warning that “supply shocks” could worsen inflation, anticipated Wednesday that “further policy adjustments are likely to be needed.”
Kansas City Fed President Jeffrey Schmid last Friday described the rate hike as just “a step in that direction” of curbing demand for goods and services to restore “balance” to the economy.
Even Warsh, whom President Trump was hitherto counting on to give him lower rates, referred to the rate hike as only a “start” toward showing the Fed is “serious” about vanquishing inflation in his post-FOMC press conference.
The operating hypothesis (hardly a new one) is that to lower inflation, the Fed must “re-balance” the economy by restricting demand, and the only tool the central bank has to constrict demand is raising the federal funds rate.
Although demand is not strong enough to “overheat“ the economy, the feeling is that demand is bumping up against supply constraints or “shocks” to keep upward pressure on prices at an unacceptable pace.
Increasingly, as inflation exceeded the Fed’s 2% target for going on six years, Fed policymakers have pleaded a kind of innocence, pointing accusing fingers at a series of “supply shocks” – Covid; the war in Ukraine; tariffs, and now the war in Iran.
Although they blame supply shocks — not excessively accommodative monetary policy and interlocking fiscal stimulus – the Fed has no control over supply, so officials see tighter credit as the only remedy to “elevated” inflation.
The question is how much tightening will be needed, and can the Fed get the job done without pushing the economy into recession, as it did when former Chairman Paul Volcker battled the double digit inflation of the late 1970s?
Without using the “soft landing” metaphor used so often by his predecessor Jerome Powell, Warsh went out of his way last Wednesday to dispute suppositions that the Fed’s rate hike was intended to limit demand or cause economic pain. In fact, he avoided even talking about the so-called “balance” between supply and demand, which Goolsbee and Schmid allege are out of kilter.
After saying the 4.1% unemployment rate is “basically running consistent with full employment,’ he said, “I don’t believe that we need to go harm to the labor markets to achieve our objective.”
“I don’t believe that the two parts of our mandate — price stability and full employment — are working across purposes over the medium term,” Warsh continued. “So, economic growth, that is, ensuring continuous, sustainable, durable economic growth, that is the business we are in. And the job we did today, the job we will continue to do, is to ensure price stability, which can mean that sustainable, durable, economic growth can go on for longer, the economy can be stronger….”
Warsh refused to give “forward guidance” about how much higher rates might go, and he again abstained from contributing a rate projection to the FOMC “dot plot.” But he strongly suggested he too thinks more rate hikes will be needed, when, after reaffirming a pledge to “deliver price stability,” he declared, “Today’s action starts to show we are serious about this.”
To say an action only “starts” to do what’s necessary seems to imply there’s more to come.
“And we will deliver on the price stability objective,” he repeated, “and … we will do it on a timelier basis. That is our decision, and when we continue our discussions over the course of the next several weeks and months, we will have more to say about it, but I am ill prepared to pre-judge those future actions.”
Some officials concur with Warsh that reducing inflation need not entail damaging the economy or jobs.
For instance, St. Louis Fed President Alberto Musalem said Monday “the labor market is not a source of inflation,” so therefore, “there’s not necessarily a need to slow the labor market down or to cool it to attain our inflation target,”
But some of Warsh’s colleagues are less sanguine about the Fed’s ability to get inflation under control with a little tweaking of rate settings without squeezing economic activity or increasing unemployment.
Goolsbee laid it on the line about what the FOMC needs to do in a Monday speech in London.
“Our policy response to persistent supply shocks may not need to be as large as it would be
if the inflation were coming from demand overheating,” he said. “But it won’t be painless either.”
“This is exactly the painful trade-off between employment and inflation that stagflationary
shocks always impose on a central bank,” Goolsbee continued. “Unfortunately, in environments like that, the only way back is the hard way.”
Prefacing those comments, the 2027 FOMC voter, countered the longstanding argument that central banks should “look through” supply shocks, saying, “in this new environment, there are some supply shocks that central banks should not simply look through—namely, the persistent ones.”
Goolsbee,said the Fed must respond to inflationary pressures coming from “imbalances between aggregate demand and aggregate supply” – and not just when those pressures are coming from the demand side. Because “supply shocks have come more frequently, hit harder, and lasted longer, some of the logic behind ‘looking through’ no longer holds.”
The Fed may be able to downplay a supply shock expected to be temporary, but a series of shocks that push up inflation “implies failing the price stability mandate,” Goolsbee warned. “If a central bank commits to hitting 2% inflation in the medium term and commits to not respond to supply shocks, then a repeated or persistent supply shock to inflation means one of those two commitments can’t hold up.”
That is the situation now confronting the Fed, he contended, noting “oil is still around $100 a barrel and potentially heading higher” and tariffs have “followed a pattern of repeated escalation.” So the Fed must act to cool demand, even if supply is the problem.
“If the forecast calls for large, persistent, recurring shocks, the central bank still has to restore price stability under its legal mandate—and the only way to bring inflation down is
to raise rates and narrow the gap between supply and demand….,” said Goolsbee, adding that since the Fed can’t influence supply, it has to close that “gap” by curbing demand, although it might be able to tighten less than if it was dealing with demand “overheating.”
“(I)if inflationary pressure rises from a negative supply shock, the only way the central bank
can close the gap is by reducing demand—and, with it, output and employment,” he said.
Goolsbee made no bones that this may necessitate weakening the labor market. Since wages are slow to adjust, “forcing inflation back to target in the short run means pushing employment below target and output below potential.”
He acknowledged doing so creates “a difficult trade-off for the dual mandate.” So the Fed “may not react as aggressively to a supply-driven imbalance as it does to a demand-driven one.”
“But again, if the shock is lasting, it can’t simply be ignored,” Goolsbee added.,
The Chicago Fed chief said he is “especially attuned to elevated inflation in service-sector industries, and to any evidence that AI data center construction is spilling out of its own lane and raising aggregate output beyond what the economy can absorb,”
Goolsbee said “either could be signs of old-fashioned demand overheating—and if demand overheats, there is no ambiguity about how the Fed needs to respond. Both are areas of concern in the recent data.”
Noting that forecasts of lower inflation have been continually pushed back, Goolsbee said, “We need evidence that these shocks are actually fading, or it’s hard to see a credible path back to 2% inflation—and harder still to justify continuing to look through them.”
Schmid also thinks the Fed needs to get the economy back “into balance” by constricting demand.
“While it might be tempting to focus on oil and other supply issues, I would argue for
taking a broader view,” he said last Friday in remarks to community bankers in Vail, Colorado. “Inflation always reflects both supply and demand developments, with rising prices indicating an imbalance between the two.”
“And while supply is certainly an issue for some commodities, the Fed should keep its eye on the overall balance in the economy,” Schmid continued. “High inflation is a signal that the economy is out of balance, and the Fed, through its influence on demand, always has a role to play when it comes to keeping inflation in check.”
Even excluding energy and food, inflation “has been running hot,” and last Wednesday’s rate
was “a step in that direction” of getting it down to target, he said.
Collins said Tuesday she sees “an increased likelihood of future scenarios in which inflation remains notably above 2%.”
“While the upside risks to inflation have increased, labor market conditions seem a bit stronger overall, and the unemployment rate remains low….,” she said after communities in Connecticut. Hence, “with the labor market on a better footing, monetary policy can focus on a timely return to price stability, especially after five and a half years of too high inflation.”
“A somewhat more restrictive federal funds rate will help ensure that inflation durably returns to target,” Collins added.
Though not voting this year, Barkin indicated Tuesday that it wouldn’t take much to get him to support additional rate hikes in the cause of fighting inflation.
“Where do we go from here?” he asked in a Tuesday speech to the CFA Society of Baltimore. “We are committed to returning inflation sustainably to our 2% target.”
“Last week’s hike will help,” Barkin continued. “Will additional hikes be required, and how many? We’ll see.”
While saying he is “open to the possibility that inflation could come back down in short order,”
the Richmond Fed chief warned, “On the other hand, inflation could prove more stubborn. Temporary shocks could drag on. New cost pressures could develop. Firming demand conditions could flow through to prices, as could the impact of today’s inflation.”
Barkin, who will be an FOMC voter next year, recalled how his father would ask, “Do I need to repeat myself?”
“Like in child rearing, one ‘talking-to’ might not be enough,” he added.
Noting that PCE inflation was 3.7% in July and that even core PCE inflation was 3.3%, he said “inflation is our troublemaker” and can’t just be blamed on the Middle East conflict or tariffs, since “more than 60% of the PCE index is rising faster than 3% year over year.”
Meanwhile, “the labor market continues to get good grades,” and the economy remains “on a solid footing,” Barkin said. So “the risks to inflation outweigh the risks to maximum employment.”
Echoing other Fed officials, Barkin blamed inflation on a “gap” between supply and demand.
Although labor demand is soft, with employers “dragging their feet” on hiring, consumer spending and “investment is booming,” he said. But on the supply side “the ‘passing’ shocks aren’t proving to be short-lived, or one-off events. New tariffs are still cropping up. The conflict in the Middle East is ongoing. And the AI build-out continues to stress those supply chains.”
Theses stresses “may pass in time, but I do expect it will take time,” Barkin said. “In the interim, there is a risk that current elevated levels of inflation could affect future inflation.”
Gov. Barr emphasized the “series of shocks over the past year and half” that “have contributed to upward price pressures” in a Wednesday speech to a Chicago Fed conference on Community Development. He listed tariffs, the Iran conflict, Russia’s war on Ukraine, and the surge in AI investment.
Like others, he put the onus on the “price stability” side of the Fed’s dual mandate.
“Economic growth is strong and the labor market is solid, but inflation is above our 2% target and not clearly trending toward target in a timely way,” said Barr. “Moreover, risks to achieving our inflation target have increased, while risks to the labor market have receded.”
Therefore, he said the FOMC “needed to recalibrate monetary policy to reflect the balance of risks to our mandate goals.”
Barr said “the FOMC took important action to that end last week by increasing the policy rate..,” but he said “,further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion.”
Paulson, a current FOMC voter, had a similar assessment of the Fed’s “balance of risks” in remarks to the 10th Annual Fintech Conference. She too prioritized bringing down inflation, since the economy and labor markets seem to be in good shape for now.
“Right now, it’s price stability that needs attention,” she said. “Inflation has been too high for too long.”
Approaching last week’s FOMC meeting, Paulson said she was asking herself “whether policy was restrictive enough to deliver 2% inflation — or whether a somewhat higher federal funds rate might be needed.” By Sept. 16, she said “it was clear that the balance of risks had shifted.”
“Underlying inflation showed little to no progress,” she said. “Tariff-related price pressures eased, but price pressures from the conflict in the Middle East and the AI buildout grew. Meanwhile, economic growth firmed up a little, and the labor market strengthened a touch. Against this backdrop, the risk of persistently elevated inflation had increased.”
Paulson said that’s why she voted for the rate hike, but she suggested it may prove insufficient.
“This recalibration brings policy closer to what I believe is needed to return inflation to 2% at a pace that balances inflation with risks to the labor market,” she said. But she warned, “if conditions evolve as I expect, some modest further tightening may be warranted.”
“Let me be clear,” Paulson added. “Returning inflation to 2% is a top priority, and I will support the policy path that gets us there while carefully weighing risks to the labor market along the way.”
Calling inflation “stubbornly elevated,” she estimated “underlying inflation” to be between 2.5% and 3.0% and said the “gap” between underlying inflation and the Fed’s 2% target “has shown little sign of closing.”
“Right now, it’s price stability that needs attention,” Paulson asserted. “Inflation has been too high for too long.”
Musalem also signaled a need for more tightening in a Monday interview with Reuters: “Both persistent demand and recurring supply forces are continuing to contribute to keeping inflation risks elevated, and I judge that without further policy restraint on inflation it is more likely to be substantially above our 2% target in 18 months than at target.”