– Inflation Too High to Consider Pause in Rate Hikes
By Steven K. Beckner
(MaceNews) – Lacking “meaningful progress” against inflation and any “trade-off” between inflation and unemployment, U.S. monetary policy should move “aggressively” from “slightly restrictive” to more restrictive, Federal Reserve Governor Christopher Waller said Thursday evening.
Waller, known as one of the more “hawkish” voting members of the Fed’s policymaking Federal Open Market Committee, said the FOMC could raise the federal funds rate by a total of 100 or 125 basis points at its two remaining meetings this year, with the exact path depending on the economic data.
He doubted whether information scheduled to come in between now and the Nov. 1-2 FOMC meeting will affect the Committee’s decision as he spoke at the University of Kentucky .
Waller brushed off talk of a ‘pause” in rate hikes given what he called the broad “persistence” of inflation, even though he said hope for an economic “soft landing” has diminished.
Waller joined the rest of the FOMC in voting Sept. 22 to raise the federal funds rate another 75 basis points to a target range of 3 to 3.25% – culminating 300 basis points of monetary tightening since the FOMC stopped holding the funds rate near zero in March. In their revised quarterly Summary of Economic Projections, FOMC participants projected the funds rate rising further to a median 4.4% at the end of 2022 and to 4.6% at the end of 2023.
Waller laid out a case for vigorous anti-inflationary rate action in coming months.
“This is not the inflation outcome I am looking for to support a slower pace of rate hikes or a lower terminal policy rate than projected in the September 2022 SEP,” he said. “And, though there are additional data to come, in my view, we haven’t yet made meaningful progress on inflation and until that progress is both meaningful and persistent, I support continued rate increases, along with ongoing reductions in the Fed’s balance sheet, to help restrain aggregate demand.”
“As far as achieving our dual mandate, this is a one-sided battle,” Waller continued. “We currently do not face a tradeoff between our employment objective and our inflation objective, so monetary policy can and must be used aggressively to bring down inflation.”
Citing the rate projections contained in the FOMC’s September “dot plot,” Waller noted “those projections showed participants expected an additional 100 to 125 basis points of tightening by the end of the year, which means either a couple of 50 basis point hikes at our remaining two meetings, or 75 basis points in November and 50 basis points in December.”
“Of course, the exact path for policy will depend on the data we receive between now and the end of the year,” he said.
Waller said that “before the next meeting on November 1–2, there is not going to be a lot of new data to cause a big adjustment to how I see inflation, employment, and the rest of the economy holding up.”
He acknowledged that the Fed will get September payroll employment data Friday and inflation reports later in October, but said, “I don’t think that this extent of data is likely to be sufficient to significantly alter my view of the economy, and I expect most policymakers will feel the same way.”
“I imagine we will have a very thoughtful discussion about the pace of tightening at our next meeting,” he said.
“So, as of today, I believe the stance of monetary policy is slightly restrictive, and we are starting to see some adjustment to excess demand in interest-sensitive sectors like housing,” he said. “But more needs to be done to bring inflation down meaningfully and persistently.”
“I anticipate additional rate hikes into early next year, and I will be watching the data carefully to decide the appropriate pace of tightening as we continue to move into more restrictive territory,” he added.
Waller totally rejected talk that the FOMC might halt or reverse rate hikes due to financial stability concerns,
“Let me be clear that this is not something I’m considering or believe to be a very likely development,” he said. “I am a little confused about this speculation. While there has been some increased volatility and liquidity strains in financial markets lately, overall, I believe markets are operating effectively.”
Waller declared that “the focus of monetary policy needs to be fighting inflation.”
Responding to questions from students, Waller said he is less hopeful of achieving a soft landing than he was in May, saying, “the longer inflation has stayed up … the narrow landing strip for a landing has gotten smaller.”
“I was much more confident of that back in May,’ he said, but inflation “just hasn’t (fallen) …. We’re not getting inflation break we all thought would happen.”
Waller said, “inflation has been more persistent,” and so “we have to be lot more aggressive than we thought 4 or 5 months ago …. So the probability of a soft landing is a lot less.”
Nevertheless, Waller reiterated, “we have to get it down,” even though that means more economic pain than previously hoped.
To reduce inflation and prevent it from becoming embedded in inflation expectations, he said, “we want to get real rates out of the negative range into a positive range,” and he noted this is what markets expect.
Asked whether the Fed might “pause” its rate hike because of the “long and variable lags” of monetary policy to assess whether past rate hikes are working to reduce ifnlation, Waller nearly scoffed at the notion, saying that the Fed can’t risk waiting to see if inflation comes down and finding that it doesn’t.
“Right now, until we see any signs of inflation beginning to moderate I don’t see how we can pause,” he said. “If it takes off … then you’re playing catch-up again.”
Asked about the Bank of England’s return to quantitative easing to address liquidity problems in the gilt market, Waller called that “a unique stiuation” that “has nothing to do with us.”
Waller’s comments came on the eve of an anxiously awaited September employment report and on the heels of early indicators of last month’s economic activity from the Institute for Supply Management. The ISM’s manufacturing index dipped nearly two points to 50.9 as new orders and employment declined. Its non-manufacturing index fell much more modestly to a still strong 56.7.
Payroll services firm ADP reported a 208,000 September rise in business payrolls, seemingly lending support to expectations that non-farm payroll gains will continue to slow. In August, payrolls grew 315,000 after rising 526,000 in July. The unemployment rate rose from 3.5% to 3.7%.
Despite this slowing, Fed officials have expressed confidence that the labor market is so strong that they can keep tightening monetary policy to soften demand and fight inflation without undue impact on jobs.
On Wednesday, for example, Atlanta Federal Reserve Bank President Raphael Bostic said, “with millions of unfilled openings and a smaller number of unemployed workers, slowing (GDP growth) need not mean that job growth dries up completely. If supply throughout the macroeconomy climbs closer to alignment with demand, then we would require less slowing of demand to bring them into balance. That would mean inflation could more likely fall without severe economic disruption.”
Voting St. Louis Federal Reserve Bank President James Bullard, whom Waller once advised as director of research for that Bank, made similar comments last week in response to a question from Mace News. “On the labor market, I think we have some room to maneuver, because unemployment is at 3,7%, and I don’t think many people think that is the natural rate of unemployment for the U.S. So now if we go to 4 1/4 or 4 ½%, or even higher than that, that would be still consistent with a very strong labor market and consistent with U.S. labor market performance historically.”
“So right now we have sort of a labor market that is unusually strong and we could go to a labor market that is just kind of normally strong, and in that sense I think we have room to maneuver,” he continued. “So I think we can be very credible in saying that if we get bad news on inflation and it does not decline, then that means (rates) need to be higher for longer in order to get downward pressure on inflation and get the economy back to a balanced growth path.”
At the same time, though, officials have been sounding ambiguous about how far they are willing to tighten, particularly if economic and financial conditions weaken further.
San Francisco Fed President Mary Daly said Tuesday that “price stability for us is extremely important,” but so is “doing it as gently as possible so that the economy can be in a balanced state as easily as possible – whatever that looks like, we are going to take the easiest path we can find.” And she added, “If Europe goes into recession, that’s a headwind; if China falters, that’s a headwind on our growth, and we have to take that into account so that we don’t end up overtightening policy.”
Bostic also sounded cautious on Wednesday. He said, “we likely still have some ways to go” and said he’d like to get the funds rate to a “moderately restrictive” range “between 4 and 4 ½ percent by the end of this year—and then hold at that level and see how the economy and prices react.”
But Bostic added, “I do not think we should continue raising rates until the inflation level has gotten down to 2 percent …. Once policy reaches what I judge an appropriately restrictive level, I’m going to analyze and assess how the Committee’s policies are flowing through the economy. If economic conditions weaken appreciably—for example, if unemployment rises uncomfortably—it will be important to resist the temptation to react by reversing our policy course prematurely.”