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Federal Reserve officials are converging around the need to keep US interest rates high for longer, reflecting concern about recent hotter-than-expected inflation data and worries about global economic trends that could fuel price pressures.
“In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will probably be necessary,” Mary Daly, president of the San Francisco Fed, said on Saturday in remarks at Princeton University. “Restoring price stability is our mandate and it is what the American people expect. So, the FOMC remains resolute in achieving this goal,” she added.
Daly’s remarks follow a series of hawkish comments from other senior officials at the US central bank, reacting to economic indicators showing that US inflation is not subsiding as rapidly as hoped. The US labour market also remains remarkably strong.
They come ahead of a pivotal month for Fed policy and economic data. Next week, Jay Powell, the Fed chair, will testify before Congress in comments that will set the stage for a highly anticipated Fed policy meeting on March 21-22 including new economic projections and interest rate forecasts.
In between, new data on inflation and the US jobs market could determine whether the Fed presses ahead with a new 25 basis point interest rate increase, as has long been expected, or is forced to be more aggressive and move interest rates up by 50 basis points.
“I think my colleagues agree with me that the risk of undertightening is greater than the risk of overtightening,” Neel Kashkari, president of the Minneapolis Fed, said this week at an event in South Dakota. He added that he was “open-minded” about whether to increase rates by 25 or 50 basis points at the next meeting.
Christopher Waller, a Fed governor, said on Thursday that “recent data suggest that consumer spending isn’t slowing that much, that the labour market continues to run unsustainably hot, and that inflation is not coming down as fast as I had thought”.
Waller added that he hoped future data showed signs of “moderation” and “progress” in the Fed’s goal of cooling the economy, but “wishful thinking is not a substitute for hard evidence, in the form of economic data” and “we cannot risk a revival of inflation”.
In her Princeton speech, Daly raised the possibility that a number of structural factors in the US and global economies may have shifted in recent years to create a far more inflationary environment in the post-pandemic world.
Over the past decades, a combination of globalisation and technological changes kept prices and wages down, as policymakers struggled to boost employment and get inflation up to the Fed’s preferred 2 per cent target.
But Daly suggested that was changing. She said one trend to watch was a decline in “global price competition”. Another was the “domestic labour shortage”, as fewer Americans seek to work and immigration remains subdued. A third was the transition to a “greener economy, which will require investment in new processes and infrastructure”, with companies looking to pass costs to consumers. Daly also warned of the danger that inflation expectations, which have remained under control, could also start to move higher.
“If the old dynamics are eclipsed by other, newer influences and the pressures on inflation start pushing upward instead of downward, then policy will probably need to do more,” she said.
Speaking to reporters after the speech, Daly said it was too early to discuss the specifics of any policy adjustment at the next meeting, saying she would be looking for “additional information” from the data.
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