The exterior of the Marriner S. Eccles Federal Reserve building is visible in Washington, DC, June 14, 2022. REUTERS / Sarah Silbiger
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June 18 (Reuters) – Federal Reserve Governor Christopher Waller on Saturday became the last US central banker to commit to any approach to fighting inflation, three days after the Fed raised interest rates by three-quarters of a percentage point and gave signal upcoming hikes.
“If the data comes as I expect, I will support a similar move at our meeting in July,” Waller said at a conference of the Society for Computational Economics in Dallas. “The Fed is ‘all in’ to restore price stability.”
Inflation, at its highest level in 40 years, has led hawks to almost all Fed politicians, only one of whom disagreed earlier this week against the largest increase in central bank interest rates for more from a quarter of a century. Read more
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Politicians currently expect to raise the Fed’s reference rate for overnight, now in the range of 1.50% -1.75%, to at least 3.4% over the next six months. A year ago, the majority thought that the percentage would have to stay close to zero until 2023.
On Friday, the Fed called its fight against inflation “unconditional,” and Atlanta Fed President Rafael Bostic, who was its best politician, said “we will do what is necessary” to return inflation to 2% to the central bank. purpose. Read more
Inflation, measured by the personal consumer price index, is more than three times this level.
“This is the most important thing I am worried about,” Waller said Saturday, adding that a rapid shift in interest rates to a neutral level and in restrictive territory is needed to slow demand and check inflation.
This monetary tightening is likely to lead to unemployment, which is now 3.6%, between 4% and 4.25%, or probably higher, Waller said, “but my goal is simply to slow down the economy.” Growing fears that the Fed’s interest rate hikes will cause a recession, he said, “are a bit exaggerated.”
Waller also said there are limits to how fast the Fed can move: markets would suffer a “heart attack” if the central bank raises interest rates by a full percentage point in a single move.
RISK OF PREVENTION
Speaking at the same event in Dallas, former Fed Vice President Donald Cohn blamed high inflation in part for the decision to postpone the tightening of policy, which he traced to the framework adopted by the US Federal Reserve in 2020. This framework precluded rising interest rates in order to prevent inflation caused by falling unemployment.
However, Waller claims that the Fed’s very specific promises about when it will stop its massive asset purchases in 2020 to shelter the economy from the effects of the pandemic are to blame.
Structural changes in the economy mean there is a “decent chance” that the Fed will cut interest rates to zero again in the future and buy bonds to fight even a typical recession, he said.
Waller said next time he would support less restrictive promises about the end of bond buying and more clarity not only on when the Fed will start tightening policy, but also how quickly. If the Fed says it will not start raising interest rates until the labor market is fully occupied, as it did in the last cycle, markets must be prepared to understand that borrowing costs will rise very quickly after interest rates begin to grow.
Kon, for his part, called for some caution as interest rates rise high enough to slow inflation, warning that the Fed risks exceeding its targets.
“It takes judgment and confidence to know when to back off,” Cohn said.
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Report by Anne Sapper Edited by Paul Simao
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