Fed Officials Claim That Inflation Justifies Rate Hikes

In her first public address since joining the Fed’s board in May, Lisa Cook said the central bank must keep interest rates low ” until we’re convinced inflation is on track to reach 2%.” Cook spoke at Peterson Institute.

Interest Rates Expected To Rise

Christopher Waller, a Fed governor, said rate rises are expected to continue until early 2023. despite the Fed’s accomplishments in slowing the economy and reducing inflation. He stressed “more work.”

Last month, the Fed raised its target rate from 3% to 3.2%. Officials predict a 1.25% rise this year. To accomplish these goals, officials may raise interest rates by 0.75 percentage points in November and another half point in December.

Mr Waller and his colleagues don’t expect new economic data to modify their outlook until November 1-2. Friday is employment report day, while Thursday is inflation report day. He expects officials to have a “thorough dialogue” about tightening.

Recent market volatility escalated. The British Pound set a record low versus the U.S. dollar after the government announced tax cuts on September 23. They would have boosted budget deficits.

As losses escalated last week, pension funds were previously considered a haven. They dumped longer-dated government bonds, aggravating market instability. To avoid liquidation, the Bank of England bought these bonds. 

The U.K. government overturned most of its first tax cut plan.

Mr Waller said the U.S. Treasury, stock, and commodities markets are quiet. He noted many policy tools the Fed may use to calm the markets if required without changing interest rates.

“Monetary policy should restrain inflation,” he stated. The Vice President chose three new Fed governors, including Cook, this year. At her three Fed meetings this year, the benchmark rate was raised by 0.75 percentage points.

Ms Cook said she supports such rises to help bring down inflation. And prevent consumers and employers from anticipating inflation to continue, which could create a cycle of rising prices.

“Cutting inflation would be costly, but failing to restore price stability would make it harder and more painful in the future.” Ms Cook, a former Michigan State University economics and international relations professor, said It’s essential to “prevent inflationary psychology.”

Recent Data Shows Pricing Are Persistent

Recent inflation data shows pricing pressures are “stubbornly persistent.” Prices of numerous items that jumped last year have declined more slowly than projected.

She altered her view regarding inflation’s duration. The discrepancy between growing inflation forecasts and actual price decreases catches my eye.

By restricting investment, consumption, and employment, governments want to reduce inflation. The Labor Department said Thursday that 219,000 individuals claimed unemployment benefits, up from 190,000 the week before. It’s the highest since late August but still below 2019 pandemic-prevention lows.

Mr Waller discussed the declining U.S. housing market on Thursday, compounded by rising mortgage rates. He predicts a “significant decrease” in U.S. home values. However, he’s less concerned about repeating the 2008 crisis due to more rigid mortgage-underwriting rules.

A decline in home costs may not show up in inflation indices for months because of how house prices are measured. Mr Waller anticipated that the Fed’s rate rises this year may moderate inflation, excluding food, energy, and housing.

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