Fed Official Warns Of Inflation Struggle

The Federal Reserve must keep raising interest rates to get inflation under control, even after last week’s report that it was slowing in October, a central bank official said Sunday.

Markets rallied after the Labor Department reported on Thursday that so-called core prices, which exclude volatile food and energy items, rose 0.3% since September, the smallest monthly gain in a year, and 6.3% in the month year-to-year comparison. after 6.6% in September. Investors and policy makers keep a close eye on core values as they reflect overall price pressures and serve as an indicator of future inflation.

Investors would have overreacted to the report if they thought it would prompt Fed officials to consider halting rate hikes, Fed Governor Christopher Waller said during a moderated discussion in Sydney hosted by investment bank UBS.

“The market seems to be way ahead here,” said Mr. Waller. “Everyone should just take a deep breath — calm down. We still have a long way to go.”

Investors cheered the report on hopes that inflation will continue to fall. Mr Waller said the Fed would like to see more evidence of this before considering halting rate hikes.

This is particularly the case, he said, after several instances over the past year in which inflation appeared to slow, only to later pick up again.

The Fed approved its fourth straight rate hike of 0.75 percentage points on November 2, raising the federal funds benchmark rate to a range of 3.75% to 4%. The Fed fights inflation by slowing the economy through tighter financial conditions — like higher borrowing costs, lower stock prices and a stronger dollar — that dampen demand.

Financial markets also rallied in July and August on expectations that the Fed might slow rate hikes. That was at odds with the central bank’s goals, as easier financing conditions boost spending and economic growth. The rally prompted Fed Chair Jerome Powell to restate a key speech in late August to reassure investors that he would not back down on his commitment to fighting inflation.

Mr Waller said on Sunday that last week’s market reaction made him concerned “to see the exact situation we were in in July”.

After their Nov. 2 meeting, Fed officials indicated that they would seriously consider approving a smaller 0.5-point hike at their next meeting on Dec. 13-14.

At their policy meeting in September, most of them forecast that they would raise interest rates to around 4.6% early next year. Officials did not release any new rate forecasts when they met this month. Mr Powell said if that had been the case they would have been higher given recent strength in the jobs market and high levels of inflation.

Mr Waller said he was ready to slow rate hikes at the upcoming meeting. He said officials are turning their attention to the eventual level of interest rates rather than the pace of increases, in part because they don’t want investors to think their resolve to fight inflation is weakening.

“The moment we said we were leaning towards a slowdown, we knew markets would be jumping for joy,” Mr Waller said on Sunday. Mr. Powell’s discussion of a higher endpoint for rate hikes was intended to “make it clear” that a slowdown in rate hikes would not mean the Fed was nearing an end, he said.

Officials are raising interest rates at the most aggressive pace since the early 1980s. As of June, they had not raised interest rates by 0.75 points since 1994. Mr Waller said he was surprised that financial markets had not shown more stress amid the rapid pace of rate hikes this year and that he was also shocked at the resilience of labor markets.

He said academic models, commonly used by central bankers to determine how much interest rates should rise, suggested monetary policy was “not as tight”. Adjusted for inflation, rates are barely above the inflation rate expected a year from now, he said.

Fed officials are attempting to ease price pressures to prevent inflation from taking hold. They fear that if consumers and businesses expect prices to keep rising, it will lead to a self-fulfilling cycle of high inflation that would be difficult to stop.

Mr Waller said he was nervous that consumer expectations about future inflation could adjust quickly, causing paychecks and prices to rise in lockstep and leaving central bankers little time to react.

“You don’t pop a balloon slowly. As soon as it works, it works,” he said.

write to Nick Timiraos at [email protected]