Two senior Federal Reserve officials have warned that not taming rising inflation will hurt the U.S. economy, and one says the situation is already testing the central bank’s credibility.
Christopher Waller, the governor of the Fed, and James Bullard, president of the St. Louis branch, used separate events to insist that the central bank was committed to fighting the uncontrolled prices that have engulfed almost every corner of the economy and which seem increasingly at risk of entrenching themselves.
“Inflation is a tax on economic activity, and the higher that tax, the more it suppresses economic activity,” Waller said at an event organized by the National Association of Business Economics.
“So if we don’t control inflation, inflation alone could put us in a very bad economic outcome in the future,” added Waller, who like Bullard, is one of the toughest policymakers.
The main concern is that high inflation, which is now running at the fastest pace in about four decades, will alter expectations about price prospects and lead households and businesses to anticipate future increases. This runs the risk of causing a destabilizing cycle that leads to an even worse inflation problem.
“Everything we know about expectations [is] once they’re left unchecked, you’ve lost, ”Waller said. For that reason, he said the Fed is“ very determined ”to control inflation.
Waller stressed that the Fed will not allow a repeat of the 1970s, when the credibility of the central bank was called into question, inflation expectations skyrocketed and then-President Paul Volcker was forced to drastically raise rates of interest, which caused widespread economic damage.
Bullard echoed those concerns, which he spoke Thursday at an event hosted by the Little Rock Regional Chamber in Arkansas. He warned that the economic situation is already “tightening the Fed’s credibility with regard to its inflation target.”
At an annual rate of 4.7% in May, so-called core PCE inflation, which eliminates volatile items, including food and energy, is well above the Fed’s 2% target.
Waller and Bullard support the Fed to offer another 0.75 percentage point rate hike when its monetary policy committee meets again later this month, after making the first such rate hike since 1994, when it met in June.
By the end of the year, most officials believe the federal funds benchmark rate should be around 3.5%, from its current range of 1.50% to 1.75%. . That level would begin to slow economic activity, Fed Chairman Jay Powell said.
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The minutes of the June meeting, released Wednesday, also suggested that rates could become “even more restrictive” if price growth is not contained enough.
As the Fed decides on the trajectory of future rate hikes, it will look for clear signs of a slowdown in the pace of monthly inflation. Officials also seem more willing to sacrifice themselves in the labor market in their attempt to remove inflationary pressures.
“We may have to take the risk of causing some economic pain,” Waller said Thursday, though he stressed that fears of the recession are “exaggerated”.
Like Waller, Bullard still sees a “good chance” of a soft landing, in which the Fed can reduce inflation without causing painful job losses.