- Won’t Take 50 bp Hikes Off the Table Until Inflation Closer To 2%
- Wants Funds Rate Above Neutral By Year’s End To Curb Demand
- Market Expectations For 250 bp Tightening ‘Consistent’ With FOMC Plans
- Prepared To Do More If Inflation Stays ‘Stubbornly High’
- Hopes Fed Can Curb Inflation Without Sharp Rise in Unemployment
By Steven K. Beckner
(MaceNews) – Federal Reserve Governor Christopher Waller said Monday he and his fellow monetary policymakers are “determined” to “do what it takes” to curb what he called “alarmingly high” inflation.
Waller said he would back “several” more 50 basis point interest rate hikes and is prepared to “do more” if inflation does not recede toward the Fed’s 2% target. He said the federal funds rate needs to rise above “neutral” to restrain demand to cool inflation.
In its quest for lower inflation, Waller expressed hope the Fed can avoid “sharp” increases in unemployment, but he made no such promise. For now, he said the economy continues to “power along,” despite the Commerce Department’s report that real GDP shrank by 1.5% in the first quarter.
Waller, speaking at the Goethe University in Frankfurt, Germany, said reduced supply constraints could help moderate inflation, but said the Fed can’t afford to wait and to count on that.
There have been some hopeful signs on inflation. After rising by 6.6% year over year in March, the price index for personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, rose 6.3% in April. The core PCE has flattened and started decelerating on a year-over-year basis. That index rose 0.3% for the third straight month in April, and was up 4.9% from a year ago, down from 5.3% in February. The core CPI has shown a similar pattern.
The Fed is also conscious that economic activity has cooled amid heightened risks stemming from the war in Ukraine and China’s anti-Covid lockdowns, raising the possibility that labor market tightness and wage pressures could ease. Minutes of the May FOMC meeting show participants viewing the economic outlook as “highly uncertain.”
But Waller indicated he is not satisfied with these tentative signs of progress in the Fed’s war on inflation.
Waller joined his colleagues on May 4 when the Fed’s rate-setting Federal Open Market Committee raised the federal funds rate by 50 basis points to a 75 to 100 basis point target range, having belatedly left the zero lower bound with a 25 basis point hike in March. After the meeting, Chairman Jerome Powell said further 50 basis point moves would be “on the table” at the June 14-15 and July 26-27 FOMC meetings.
Waller was adamant about continuing the fight to reduce inflation. “I cannot emphasize enough that my FOMC colleagues and I are united in our commitment to do what it takes to bring inflation down and achieve the Fed’s 2 percent target.”
He said he will “support tightening policy by another 50 basis points for several meetings, and he added, “I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2 percent target.”
By the end of 2022, Waller said he “support(s) having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation.”
“This is my projection today, given where we stand and how I expect the economy to evolve,” he continued, adding, “my future decisions will depend on incoming data.” He said he will be closely watching the May employment and Consumer Price Index reports “to get information about the continuing strength of the labor market and about the momentum in price increases.”
Waller vowed that “if the data suggest that inflation is stubbornly high, I am prepared to do more.”
Answering questions after his speech, Waller if anything sounded even more aggressive. If inflation doesn’t go away, he said, that policy rate is going “way up.”
Noting that financial markets expect a total of 250 basis points of tightening this year, he said “this expectation represents a significant degree of policy tightening, consistent with the FOMC’s commitment to get inflation back under control.”
“And, if we need to do more, we will,” he added.
Noting that previous and anticipated monetary policy actions have already resulted in a significant tightening of financial conditions, Waller suggested this is a good thing in that “higher rates make it more expensive to finance spending and investment which should help reduce demand and contribute to lower inflation.”
Amid proliferating warnings of recession, Waller was sanguine.
“Despite a pause early this year in the growth of real gross domestic product (GDP), the U.S. economy continues to power along at a healthy pace,” he said, adding that “the contraction in output reported in the first quarter was due to swings in two volatile categories, inventories and net exports, and I don’t expect them to be repeated.”
He also reported to the strength of the labor market, which he called “very tight.”
In part because of labor market tightness, inflation is “alarmingly high,” said Waller, who said “it is the FOMC’s job to meet our price stability mandate and get inflation down, and we are determined to do so.”
Waller expressed “hope that over time supply problems resolve and help lower inflation,” but he said “the Fed isn’t waiting for these supply constraints to resolve. We have the tools and the will to make substantial progress toward our target.”
He remained hopeful the Fed will be able to achieve a “soft landing” in the face of growing doubts this will be possible.
“The relationship between vacancies and unemployment gives me reason to hope that policy tightening in current circumstances can tame inflation without causing a sharp increase in unemployment,” he said.
He added the caveat that “the path of the economy depends on many factors, including how the Ukraine war and COVID-19 evolve,” but said he is “optimistic that the strong labor market can handle higher rates without a significant increase in unemployment.”
Since the May meeting, there have been mixed messages from Fed officials about the rate path after mid-year. A week ago, Atlanta Federal Reserve Bank President Raphael Bostic went so far as to say “a pause in September might make sense” before deciding how much higher rates might need to go.
Among FOMC voters, Powell and Cleveland Federal Reserve Bank President Loretta Mester have allowed for a slower pace of rate hikes at the Sept. 20-21 meeting if inflation moderates, but if it doesn’t they have said the FOMC would need to keep raising rates aggressively.
In his latest public remarks, Powell vowed the FOMC will “keep pushing” rates up until it is convinced inflation is heading back toward its 2% goal, even it means unemployment ticks up “a few tenths” and said the FOMC “won’t hesitate” to push rates above neutral if necessary. But he left room for a more graudal policy course.
“What we need to see is clear, convincing evidence that inflation pressures are abating,,,,” he said. “If we don’t see that we’ll have to consider moving more aggressively… If we do we’ll consider a slower pace.”
Kansas City Fed President Esther George said last Monday that “evidence that inflation is clearly decelerating will inform judgments about further tightening. St. Louis Fed President James Bullard mused that, by next year, the Fed “could be lowering the policy rate because we got inflation under control.”
Contact this reporter: steve@macenews.com
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