– Jefferson: Inflation Risk To Upside; Worried People Will Stop Believing Fed 2% Goal
– Collins: Some ‘Promising’ Inflation Signs; Others Less Promising; Still Upside Risks
– Kashkari Downplays PCE Report As Just “A Snapshot’; Foresees More Rate Hikes
– Cook: Inflation ‘Too High For Too Long’; Labor Market Can Handle Tightening
By Steven K. Beckner
(MaceNews) – Federal Reserve officials have continued this week to lean toward additional monetary tightening two weeks after the Fed’s policymaking Federal Open Market Committee raised short-term interest rates modestly for the first time in three years.
With the FOMC scheduled to meet again in late October, there is no uniformity or certainty about when rates may rise again or about how many more rate hikes will prove to be necessary to get inflation convincingly on a downward trajectory to the Fed’s 2% target.
However, there doesn’t seem to have been any significant shift in how Fed officials see the balance of risks to their dual mandate of “maximum employment” and “price stability.” With the economy perceived as doing well enough to withstand some monetary firming, their primary focus remains heavily on fighting inflation. And while a few more hopeful signs have come in, Fed Chairman Kevin Warsh and his fellow policymakers are apt to want more evidence that inflation is convincingly moderating.
As the week began, Fed. Governor Lisa Cook implied a willingness to vote for multiple rate hikes to counteract what she sees as “continuous” upward pressure on inflation in an environment of strong economic activity and employment.
Fed Gov. Michael Barr also sounded willing to vote for more than one additional rate hike Tuesday, when he said “further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion” and then said,” and then said he doesn’t see a clear path to “a timely return to 2%>”
New York Federal Reserve Bank President John Williams sounded more hopeful about controlling inflation without a lot of additional rate action Tuesday. Warsh’s top lieutenant cast doubt on an Oct. 28 rate hike when he said “there is no urgency” about raising rates and spoke of “one further upward adjustment …. late this year” as “appropriate.”
Those comments came before a Commerce Department report showing that inflation, as measured by the price index for personal consumption expenditures, rose a less than expected 3.4% in August from a year earlier. The core PCE rose 3.3%, also less than expected.
On a less encouraging note, the price component of the Institute for Supply Management’s manufacturing purchasing managers index jumped from 71.1 to 77.9 last month.
Even following the PCE report, Fed officials continued to voice concern about price pressures.
Most recently, Federal Reserve Board Vice Chairman Phillip Jefferson said inflation risks remain “to the upside” and said the FOMC must act to ensure that people don’t lose confidence in the Fed’s commitment to price stability. He called the Sept. 16 rate hike “an important step” in that direction, but said the FOMC will have to form a judgment on “any future adjustments in policy” that may be needed to lower inflation and contain inflaiton expectations.
Minneapolis President Neel Kashkari, who voted for the Sept. 16 rate hike, said Wednesday evening that the PCE report had not changed his view, dismissing it as just “a snapshot” and projecting an unspecified amount of additional monetary tightening.
Cook reiterated on Wednesday afternoon that “inflation has been too high for too long” and said she is “committed to returning inflation to our objective while preserving the strength in the labor market.”
She was speaking at a Richmond Federal Reserve Bank conference on the rural economy, where Thursday morning a trio of Federal Reserve Bank Presidents again identified inflation as the main challenge facing them.
The host, Richmond Fed chief Tom Barkin cited a speech he gave last week, in which he likened raising rates to disciplining a problem child and said sometimes such a child may need “more than one talking-to.”
Boston Fed chief President Susan Collins, apparently referencing the PCE report, acknowledged “some promising pieces,” but said other parts of the inflation picture are less promising and said she still sees further upside risks.
The Kansas City Fed’s Jeffrey Schmid said the Fed “hasn’t fulfilled its promise” and needs to maintain “a laser focus” on inflation.
The FOMC raised the federal funds rate by 25 basis points to a target range of 4.75% to 5.0% on Sept. 16 – nine months after completing a series of rate cuts totaling 175 basis points over 15 months.
FOMC participants, not including Warsh, projected only one more 25 basis point rate hike 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. However, market participants are speculating about more rate hikes.
Warsh described the rate hike was a “start” toward showing the FOMC is “serious” about fulfilling its pledge to “deliver price stability,” ostensibly implying there’s an indefinite amount of additional tightening to come.
It might be said the Fed is caught “between a rock and a hard place.” On the one hand there is the Trump administration, which continues to pressure the Fed to lower interest rates, or at least abstain from raising them. So far, the President has largely refrained from the kind of insults he aimed at Warsh’s predecessor Jerome Powell (“knucklehead,” etc.), but he’s lately enlisted Treasury Secretary Scott Bessent in the effort to hold down rates.
Bessent used an appearance on Fox News’ Sunday Morning Futures program to urge Warsh and his fellow policymakers to “keep an open mind” about raising rates to combat inflation. He contended productivity-increasing capital investment and deregulation will reduce inflation without additional monetary restrain and recalled that former Fed Chairman Alan Greenspan “let things run” under similar circumstances in the 1990s.
Besides, the former Soros Fund Management partner said, “core inflation has been very quiescent, and is has actually dropped over the past few months.”
Bessent’s argument that faster productivity growth will bring down inflation seems designed to appeal to Warsh, who before being nominated as Fed chief, made similar points on a number of occasions.
On the other side, the Fed must deal with so-called “bond market vigilantes” – shorthand for the vast market for Treasury securities, where yields have spiked to levels not seen in years.
Echoing Warsh, Cleveland Fed President Beth Hammack maintained last Friday that rising bond yields largely reflect strong economic growth, not rising inflation expectations. Nevertheless, it might be hard for the Fed to ignore bond market signals and hold short-term rates steady if incoming inflation numbers continue to drive data-sensitive market interest rates higher.
The FOMC has perennially forecast lower inflation, but thus far the data have not fully cooperated. Officials anticipated that inflation won’t reach 2% until 2029 in the latest SEP.
Strong readings on employment and economic activity have contributed to market perception that rates need to go higher. They are seen as signifying inflationary demand strains on limited resources, while also reflecting increased investment demand for capital.
Williams, who as FOMC Vice Chairman is usually less inclined to get out in front on monetary policy, signaled a slow, incremental approach to further tightening Tuesday.
“With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information,” he said at the University at Buffalo, New York. “The accumulation of more data should provide greater clarity on the underlying trends in the economy and the associated risks to achieving our goals—and thereby the appropriate setting of monetary policy.”
Williams’ forecast is for inflation to slow to “just above 2%” next year” before falling to 2% in 2028, “as the effects of tariffs move further into the rearview mirror, energy prices normalize, and the demand and supply of AI-related goods move back toward better balance.” He expects this disinflation to occur in the context of above-trend real GDP growth of 2.25% and a dip in unemployment to 4.0%.
That will enable the FOMC to go slow on raising rates, he believes. “If the economy evolves in a manner broadly consistent with my forecast, one further upward adjustment of the federal funds target range may be appropriate late this year to support a timelier return of inflation to target. That is just my forecast, and time—and the totality of the data—will tell.”
He said the FOMC had to act on Sept. 16 because “the balance of risks to achieving our dual mandate has evolved in recent months. With the economy proving resilient in the face of shocks and with underlying demand strengthening, the risk to maximum employment has receded.”
“At the same time, the risk to achieving price stability has increased,” Williams continued. “In particular, the inflationary impact of the AI-related demand shock is increasingly salient, and I now expect somewhat larger and longer-lasting effects from energy prices on inflation.
He said “it is imperative that we return inflation to our 2% target on a sustained basis. To do so, we must make certain that adverse inflationary disturbances do not become entrenched, and that any second-round effects on inflation remain muted….While monetary policy cannot move ships or reopen pipelines and refineries, it can diminish the risk that these supply shocks spill over into broader and more persistent inflation.”
“The overall economy is on a solid footing; therefore, getting inflation back to 2% is job No. 1,” Williams went on in a speech titled “Unwavering Dedication, adding that he is “firmly committed to achieving the Fed’s dual mandate goals of maximum employment and price stability.”
Prior to the PCE report, other FOMC voters, including two members of the Board of Governors sounded more inclined than Williams to tighten further without much delay, perhaps beginning with the Oct. 27-28 meeting.
Gov. Cook said she voted for the Sept. 16 rate hike because inflation “has been too high for too long,” and she strongly implied more rate hikes will be needed in remarks to a tech conference in Oakland, California.
Meanwhile, she suggested, the economy is strong enough to withstand whatever monetary tightening may prove to be necessary.
Cook observed that inflation has been running “almost double our target…..Furthermore, in coming months I expect to see continued pressure on inflation from the AI buildout … and from the pass-through of higher oil prices and supply chain disruptions associated with the conflict in the Middle East.”
Meanwhile, she said ”the labor market appears to be well positioned to handle an increase in rates,” and “the strength seen in the labor market is also present in the broader data on economic growth, which has remained remarkably resilient over the past year.”
Cook, a Biden appointee whom Trump has targeted for dismissal,” said she “will consider what policy rate may be needed to continue to guide inflation down to our targe” and added that “the number and magnitude of any future adjustments will be informed by observations of the economy’s reaction to our policy actions thus far and the inflation and labor data over the coming months.”
She allowed for the possibility that AI investments will boost productivity, but said she expects only limited help against inflation from that source. She expressed more concern that AI investment and rising oil prices will bring “continued pressure on inflation.”
Without mentioning Bessent, she suggested he is over-rating the disinflationary influence of productivity.
“Currently, I anticipate that productivity gains will provide modest disinflation within the next few years,” said Cook. “However, I do not expect those effects to arrive in time to offset the broadening inflationary pressure later this year. Moreover, uncertainty surrounds any estimates related to how and when this mechanism may operate…”
“In a scenario where the productivity gains are spread evenly across the economy, I expect the relief to be limited but real,” she elaborated. “It is limited, because higher productivity not only raises the economy’s potential supply but also raises demand through the expectation of higher future wages, better returns on investment, and the accompanying gains in wealth…..”
“On balance, a broad-based increase in productivity, when and if it comes, could lead to a modest easing in price pressure,” Cook added.
What’s more, she suggested the disinflationary influence of productivity gains could be outweighed by other AI-related forces. Given “some economy-wide pressure from AI-fueled demand, … increased AI investment could introduce price pressure to … other sectors…. (The AI-generated increase in energy, water and other costs) introduces the risk that, even as inflation in the narrow AI sector moderates, new and more broadly based price pressures may take its place.”
Gov. Barr seemed equally inclined to vote for further rate hikes Tuesday, He saw the impact on interest rates of higher productivity and higher demand for capital as basically offsetting each other, leaving the Fed to focus on fighting inflation, not supporting economic growth and employment.
“In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion,“ he told the Detroit Economic Club. But he simultaneously suggested that a “timely” return to 2% inflation is not in the cards.
“While the effects of tariffs may have diminished, high energy prices are still with us, and there is considerable uncertainty about when the conflict driving them may be resolved,” Barr said. “At the same time, it is apparent that the surge of investment, and related demand from the AI buildout, is having a measurable effect on prices. The combined effect has meant we have been knocked off course on our progress toward our 2%.”
Counting “only two months of data consistent with 2% core PCE inflation over the past 20 months,” he said. “I don’t yet see a clear trend toward a timely return to 2%.”
Like Cook, Barr did not cite Bessent’s call on the Fed to not raise rates because of productivity (or Warsh’s prior comments to that same effect), but he gave a similar refutation.
“In the event that we see a long-lasting boost to productivity growth, wages and economic activity could grow more than would otherwise be the case without putting upward pressure on inflation….,” he said. “But at the same time, demand for capital would rise because of the higher returns on investment, and household savings would fall due to expectations of stronger real wage growth and, thus, higher lifetime earnings.”
“Balancing this shift in savings and investment would require higher interest rates in equilibrium—what monetary economists would call a rise in r*,” Barr continued. “That, in turn, implies a higher setting for the policy rate.”
“In my view, it is too early to know if these dynamics are in play right now.” he went on. “What is clear right now is that inflation is too high.”
Wednesday’s better than expected PCE inflation report did not seem to greatly cool officials’ ardor for anti-inflationary monetary policy.
Jefferson continued to express strong concern about inflation and inflation expectations Thursday afternoon, even after taking note of the smaller August PCE increase.
“I remain concerned about the risk of higher energy prices leading to a persistent rise in inflation more broadly,” he said at the University of Virginia, adding that “the boom in AI-related demand is driving unusually strong increases in the cost of producing related goods and services, contributing to the rise in core goods prices.”
Although Jefferson said “most measures of longer-term inflation expectations … have remained stable at levels consistent with 2% inflation,” he issued a strong caveat: “(I)f actual inflation remains above our target, then households and businesses may eventually stop believing that we will return inflation to 2%. This potential uncertainty could lead to a rise in longer-term inflation expectations and affect wage- and price-setting decisions, and I am committed to avoiding this outcome.”
His “base case” is for inflation to resume its decline toward 2% as the effects of energy and other price shocks fade,” but he warned, “I view risks to my inflation forecast as tilted to the upside…”
Jefferson voted to raise rates because he saw it as “an important step to ensure longer-term inflation expectations remain well anchored and to validate the public’s confidence that we will achieve our 2% inflation objective in a timely manner.”
Like others, he implied the economy and labor markets can do with less monetary accommodation, calling them “solid,” despite “being buffeted by a cascade of shocks…”
Looking ahead, Jefferson said, “any future adjustments in policy should be determined by carefully examining trends in the data, the evolving outlook, and the balance of risks.”
Like financial markets, “my colleagues and I will need to come to our own judgment, which may take more time,” he said. “I will continue to assess whether underlying trends suggest that inflation will return to target with sufficient speed.”
Nor did other officials seem particularly persuaded that the PCE data relieves them of responsibility to battle inflation.
Kashkari, one of three Federal Reserve Bank Presidents who dissented against holding the funds rate steady on July 29, called the PCE report a mere “snapshot” Wednesday and said “my basic takeaway on the inflation data is that inflation is still too high.”
But he told the Council on Foreign Relations in New York he “know(s) monetary policy can work” and said he expects an unspecified amount of additional tightening.
Similar sentiments emerged from a Thursday morning panel of Fed presidents.
Collins, explaining her support for the Sept. 16 rate hike and why she may support future ones, said, “what I’m seeing is economic growth is near trend if not more robust than that… The labor markets overall are balanced..The overall number is near full employment…”
“But inflation is too high, and it’s been too high for too long,” she continued, “and the data that we see, there are some promising pieces, but there’s some parts that aren’t as promising, and I see more risks on the inflation side.”
“And so with the labor market on relatively solid footing monetary policy has to focus on ensuring that we restore in a timely way sustainable, durable 2% inflation,” Collins added.
Sounding even more hawkish, as usually does, Schmid said, “Arguably, we just haven’t fulfilled our promise on the inflation side. As I think Chairman Warsh says, we have work to do.”
“Inflation’s an economic thief,” he went on. “If you don’’t control prices to a degree then people can’t kep up, and things like wealth gaps just get bigger when it comes to things like payrolls and trying to achieve more with your skillset.”
“So I think we have to have a laser focus on it (inflation),” Schmid added.
The three Fed chiefs were reluctant to talk about how much higher rates might need to go.
“Let’s see what develops,” Barkin responded.
Collins said, “we can’t get ahead of the data.” But she said “we need to be forward looking,” since monetary policiy affects the economy “with a lag.”