By Steven K. Beckner
(MaceNews) – Federal Reserve officials continued to pledge their determination to reduce inflation in wake of a stronger-than-expected employment report Friday.
The officials welcomed the moderation of inflation in recent months but noted that core services prices continue to rise rapidly and warned against prematurely giving up on their anti-inflation campaign.
They gave no clear indication, however, of how much the Fed’s policymaking Federal Open Market Committee will raise the federal funds rate at its next meeting of Jan. 31 to Feb. 1.
On Dec. 14, the FOMC raised the funds rate a seventh time since it ceased holding it near zero last March, lifting it by 50 basis points to a target range of 4.25% to 4.50% after four straight 75 basis point increases. The Committee reiterated that “ongoing increases” were likely to be needed to make the policy rate “sufficiently restrictive” to reduce inflation to the Fed’s 2% target.
FOMC participants revised up their projections for 2023 from 4.6% in the September Summary of Economic Projections to 5.1% in the December SEP. Individual projections ranged from as low as 4.9% to as high as 5.6%. Minutes note that “all participants had raised their assessment of the appropriate path of the federal funds rate relative to their assessment at the time of the September meeting” and that “no participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.”
Inflation, as measured by the Fed’s preferred gauge, slowed to a 5.5% year-over-year rate in November, while the Consumer Price Index slowed to 7.1% from a June peak of 9.1%. But both remain far above its 2% target. FOMC participants project PCE inflation will slow to 3.1% next year, up from 2.8% in September.
Fed Governor Lisa Cook made clear that she remains dissatisfied with the pace of inflation as she spoke at the convention of the Allied Social Sciences Associations in inflation.
“Inflation remains far too high, despite some encouraging signs lately, and is therefore of great concern,” she said at the annual gathering of thousands of economists.
“As a Fed policymaker, I am committed to bringing inflation back to our 2% goal,” she said.
Cook acknowledged that price indices “are down a bit from the peaks reached in the first half of last year. However, monthly data are quite volatile, so I would caution against putting too much weight on the past few favorable monthly data reports.”
She attributed “high and volatile inflation” to “rapid shifts in demand, coupled with supply-chain disruptions. This has led to sizable demand–supply imbalances across different sectors.”
She continued, “In contrast to core goods inflation, which has declined over the past year, housing services inflation has continued to rise rapidly, and inflation in other core services has been little changed on balance.”
Cook noted that “many indicators suggest that shortages of inputs have abated, and transportation costs have started to fall,” but said “inflation in other core services – a large category that covers activities as varied as travel and recreation to medical and legal services – has remained stubbornly high.”
“An important source of inflation pressures in this category is the shortage of workers, which has pushed up labor costs at rates above those consistent with 2% inflation,” she continued.
Cook blamed tight labor markets. “The inflation outlook for this non-housing category of core services partly depends on whether growth in nominal labor costs comes back down, and recent data suggest that labor-compensation growth has indeed started to decelerate somewhat over the past year.”
Cook refrained from talking about the size of further rate hikes, but strongly suggested further action is needed.
“Crucially, we must be vigilant to ensure that pandemic-era cost pressures and disruptions do not have lasting effects on inflation,” she warned. “If cost shocks and supply disruptions keep inflation elevated for a long enough period, households’ and firms’ inflation expectations could move higher – a development that could put additional upward pressure on inflation.”
Meanwhile, Richmond Federal Reserve Bank President Thomas Barkin asserted that the Fed has to keep tightening monetary policy to contain inflation, but didn’t say how much.
He acknowledged Fed rate hikes create downside risks, but sounded fairly sanguine about avoiding the worst. In any case, he said the Fed can’t afford to give on its anti-inflation campaign prematurely.
“Once demand weakens, studies estimate it can take another six to 12 months before those pullbacks quiet the rate of inflation,” Barkin told the NC Chamber and NC Bankers Association. “So, with demand slowing but resilient, labor markets healthy, and the added and enduring shock of the war in Ukraine, it shouldn’t be a surprise that inflation – while likely past peak – is still elevated.”
Barkin, who will be voting on the FOMC next year, said, “We still have work to do. Inflation is too high, and we will need to stay on the case until it is sustainably back to our 2% target.”
Noting that the FOMC has slowed the pace of rate hikes, he said “what we were doing was taking our foot off the gas.”
“Now, with forward-looking real rates positive across the curve and therefore our foot unequivocally on the brake, it makes sense to steer more deliberately as we work to bring inflation down in the context of the lags,” he went on.
Barkin said, “The last two months’ inflation prints have been a step in the right direction,” but he cautioned “while the average dropped, the median stayed high. That’s because the average was distorted by declining prices for goods like used cars that escalated unsustainably during the pandemic.”
Barkin conceded that the Fed’s “strong action to combat inflation … creates downturn risk,” but said, “the Fed’s objective isn’t to hurt the economy; it’s to reduce inflation.” And he said that is necessary to avoid repeating past mistakes.
“The experience of the ’70s showed that if you back off on inflation too soon, it comes back stronger, requiring the Fed to do even more, with even more damage,” he said. “If you change the target before it is achieved, as some have recently advocated, you put the Fed’s credibility at risk, which in turn increases the sacrifice required in order to control inflation.”
“And if you think supply chain improvements and our actions to date are enough to bring inflation down quickly, then our more gradual rate path should limit the harm,” if you added.
Kansas City Fed Esther George, in her last speech before retiring at the end of the month, struck a similar tone at the Central Exchange in Kansas City, echoing concerns about stubborn core service price inflation and not giving up the fight against inflation prematurely.
“While the recent data on inflation has been encouraging, eliminating the imbalances that have been driving prices higher will be required to restore price stability,” she said.
“So far, the increase in interest rates has worked to slow demand growth, allowing supply to catch up, particularly for goods,” George said. “But even as goods prices have started to decline, services prices continue to rise, boosted by a tight labor market.”
George said, “How much additional tightening will be needed to bring inflation back to 2% remains an essential aspect of the Federal Reserve’s deliberations.”
Like others, she warned, “the longer inflation remains above its 2% objective, the greater the chance that higher inflation becomes embedded in the expectations of workers, producers, and consumers. History has shown that once inflation becomes ingrained in public expectations, it can be very costly to combat.”
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