Federal Reserve Governor Christopher Waller on Saturday became the latest U.S. central banker to pledge an all-costs approach to tackling inflation, three days after the Fed hiked interest rates by three-quarters of a percentage point and announced further increases to come.
“If the data comes in as I expect, I will support a similarly sized decision at our July meeting,” Waller said at a Society for Computational Economics conference in Dallas. “The Fed is ‘all in’ to restore price stability.”
A spike in inflation, which is at its highest level in 40 years, has made hawks out of almost all Fed policymakers, only one of whom earlier this week opposed what was the strongest increase in central bank rates in more than a quarter of a century.
Policymakers currently expect to raise the Fed’s benchmark overnight interest rate, now in a range of 1.50% to 1.75%, to at least 3.4% over the next six months. month. A year ago, the majority believed that the rate should remain close to zero until 2023.
On Friday, the Fed called its fight against inflation “unconditional” and Atlanta Fed President Raphael Bostic, who had been its most dovish policymaker, said “we will do whatever it takes.” to bring inflation down to the central bank’s 2%. target.
Inflation, as measured by the personal consumption expenditure price index, is more than three times that level.
“That’s the most important thing that worries me,” Waller said on Saturday, adding that moving rates quickly to neutral and into restrictive territory is necessary to slow demand and control inflation.
This monetary tightening will likely drive unemployment, currently at 3.6%, between 4% and 4.25%, or even higher, Waller said, “but my goal is just to slow the economy down.” Growing fears that the Fed’s rate hikes could cause a recession, he said, “are a bit overblown.”
Waller also said there are limits to how quickly the Fed can act: Markets would have a “heart attack” if the central bank raised rates by one percentage point in one move.
Risk of overspending
Speaking at the same event in Dallas, former Fed Vice Chairman Donald Kohn blamed high inflation in part on a decision to delay policy tightening which he attributed to an executive that the US central bank adopted in 2020. This framework ruled out a rate hike to anticipate inflation triggered by falling unemployment.
Waller, however, argued that it was the Fed’s overly specific promises about when it would end its massive asset purchases, implemented in 2020 to shield the economy from pandemic-related fallout, that were at fault.
Structural changes in the economy mean there is a “decent chance” that the Fed will have to cut its key rate to zero again in the future and buy bonds to fight even a typical recession, he said. he declares.
Waller said next time around he would support less restrictive promises around an end to bond purchases and more clarity on not just when the Fed will begin to tighten policy, but also how quickly. If the Fed says it won’t start raising rates until the labor market reaches full employment, as it did in the recent cycle, markets should be ready to understand that the costs borrowing will increase very quickly once rates begin to rise.
Kohn, for his part, urged caution once rates get high enough to begin to slow inflation, warning that the Fed risks overshooting its targets.
“It takes judgment and confidence to know when to back off,” Kohn said.
By Anne Sapphire