– Need to Keep Monetary Policy ‘Modestly Restrictive’ To Reduce Still High Inflation
By Steven K. Beckner
(MaceNews) – The Federal Reserve is approaching a point where it should “slow the pace” of interest rate reductions, new Cleveland Federal Reserve Bank President Beth Hammack said Friday.
Hammack, a voting member of the Fed’s rate-setting Federal Open Market Committee, said the FOMC needs to keep monetary policy “modestly restrictive” to complete the job of reducing inflation to its 2% target.”
She said the Fed is already close to a “neutral” monetary policy stance.
Speaking after the Labor Department released better than expected November job numbers, Hammack called the labor market “healthy,” while warning that inflation is “still not back to where we want it to be.”
Hammack’s remarks come in the wake of a host of comments from other Fed officials, led by
Chairman Jerome Powell. The general tone has been that the FOMC needs to lower rates further, but cautiously.
The FOMC has lowered the federal funds rate by an aggregate 75 basis points, including a 50 basis point reduction on Sept. 18 and a 25 basis point move on Nov. 7, which took the policy rate down to a target range of 4.5% to 4.75%.
In their quarterly Summary of Economic Projections, published on Sept. 18, FOMC participants projected the policy rate would fall to 3.4% by the end of 2025 and to 2.9% by the end of 2026. A revised “dot plot” will be released on Dec. 18.
FOMC participants have been raising their estimate of the longer run or “neutral” funds rate, most recently to 2.9%, which implies a “real” rate of 0.9% plus the 2% inflation target.
Speaking Wednesday, Powell said “’we’re now on a path to bring rates back down to a more neutral level over time. But … the economy is strong, and it’s stronger than we thought it was going to be in September. The labor market is better, and the downside risks appear to be less in the labor market. Growth is definitely stronger than we thought, and inflation is coming in a little higher.”
So, Powell added, “we can afford to be a little more cautious as we try to find neutral.”
Hammack, who took office on August 21, 2024, sounded less eager to cut rates than some, such as Governor Christopher Waller who early this week said he is ‘leaning” toward a December rate cut.
Despite cautionary comments from Powell and others, markets have priced in fairly high odds of a 25 basis point rate cut on Dec. 18.
Like other Fed officials, Hammack said “there are risks on both sides of my expected policy path.”
“Keeping interest rates higher than needed could unnecessarily harm the health of the labor market,” she said. “But easing interest rates too much or too quickly could slow the return of inflation to 2% and contribute to froth in financial markets, a situation that could undermine financial stability and impede progress on our monetary policy goals.”
But Hammack put more emphasis on inflationary risks. “As long as inflation is above our objective and the labor market remains strong, my focus remains on finishing the task at hand. Admittedly, it’s a careful balancing act.”
Although the unemployment rate rose a tenth to 4.2% last month, she said “it’s still historically low. In fact, it’s near many estimates of its longer-run level.” Meanwhile, she noted that non-farm payrolls had risen a greater than expected 220,000, together with upward revisions to prior months.
“Overall, the economy is strong, and the labor market is healthy,” Hammack said.
Meanwhile, although “inflation has eased considerably over the last two years,” she said “it remains above the FOMC’s objective.”
Inflation is “still not back to where we want it to be,” Hammack said. “The economy has made it most of the way to this objective, but there is further to go, and success is not assured.”
Hammack said “the challenge for monetary policy is to sustain the healthy labor market conditions we have been experiencing while finishing the job of bringing inflation back to 2% on a sustained basis. There is more work to do.”
Pointing to 2 ¾% real GDP growth, she said “the US economy at this time has a good amount of momentum and a history of surprising resilience.”
Given “resilient growth, a healthy labor market, and still-elevated inflation,” Hammack said “it remains appropriate to maintain a modestly restrictive stance for monetary policy for some time.”
What’s more, Hammack agreed with other officials who have said the FOMC needs to consider the possibility that rising real interest rates are pushing up the putative “neutral” funds rate.
“Some of the forces that appeared to be holding down the neutral rate following the Global Financial Crisis may have finally run their course or reversed,” she said. “In addition, even estimates from the most sophisticated models of neutral rates tend to have a great deal of uncertainty around them.”
“As I take into account strong economic growth, the low unemployment rate, still-elevated inflation, and signals from financial markets, among other factors, my overall view is that monetary policy is only somewhat restrictive today,” she continued, adding, “we may not be too far from a neutral setting today.”
With that as backdrop, Hammack suggested the FOMC may need to pause monetary easing soon.
“To balance the need to maintain a modestly restrictive stance for monetary policy with the possibility that policy may not be far from neutral, I believe we are at or near the point where it makes sense to slow the pace of rate reductions,” she asserted.
“Moving slowly will allow us to calibrate policy to the appropriately restrictive level over time given the underlying strength in the economy….,” she went on. “To me, this situation calls for a slower pace of rate cuts relative to my September forecast. Achieving our goals means seeing further convincing evidence that inflation is indeed continuing to decline to 2 percent while sustaining a healthy labor market.”