The US Federal Reserve should keep considering large interest rate hikes, similar to the 75 basis-point rise approved last month, until inflation meaningfully declines, Fed Governor Michelle Bowman said.
“My view is that similarly sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way,” Bowman said on Saturday in remarks prepared for an event organized by the Kansas Bankers Association.
Bowman added that she supports last month’s rate increase, and backs the move away from offering specific forward guidance at news conferences following policy meetings.
Photo: Reuters
Policymakers lifted rates by 75 basis points last month and in June, part of an aggressive tightening campaign aimed at cooling inflation that is running at the fastest pace in 40 years. A strong jobs report released on Friday adds more pressure on the Fed for it to make another big move next month to cool demand and bring price gains under control.
The US economy added 528,000 jobs last month, more than double estimates, and the unemployment rate fell to 3.5 percent, matching a five-decade low.
The size of the next rate increase is ultimately to be decided by economic data, Bowman said.
“While I expect that ongoing rate increases will be appropriate, given the uncertainty in how those data and conditions will evolve, I will allow that information to guide my judgment on how big the increases will need to be,” she said.
Bowman said she expects economic growth to pick up in the second half of this year and to see “moderate growth” next year. She expects the labor market to stay strong as the Fed continues raising rates and shrinking its balance sheet, but she cautioned that the moves could lead to a slowdown in job gains and potentially spark employment losses.
The policymaker also reflected on how Fed officials responded to hot inflation last year.
She said revisions of economic data, combined with restrictive forward guidance, limited the Fed’s ability to remove accommodation and “led to a delay in taking action to address rising inflation.”
Separately, former US secretary of the treasury Lawrence Summers said he is concerned that a slowing in headline inflation could prompt the Fed to conclude its policies are working, when much more action is in fact needed.
“I’m worried we’re going to see some good news on non-core inflation,” Summers said ahead of consumer price data due on Wednesday that are set to show a retreat in inflation, thanks especially to a slide in gasoline costs.
Combined with some signs of economic slowing, the danger is that it would “lead the Fed to think that things are under control,” Summers said.
The US economy remains in an “overheated” state, as showcased by last month’s employment and wage figures, Summers said.
A “red hot” labor market would mean “constant or even accelerating inflation,” he said.
Summers, a Harvard University professor, said that his sometime intellectual sparring partner on economics, the Nobel laureate Paul Krugman, also cautioned that now is not the time for the Fed to alter course.
Krugman wrote earlier in the New York Times that “the good news we’re about to get about short-term inflation isn’t evidence that the strategy has already worked, and alas (I’m usually a monetary dove), it offers no justification for a pivot toward easier money.”
Summers said the danger is “we’re going to have a situation like we did in the 1970s, where we perpetuated inflation by not doing enough to contain it.”
Stripping out food and commodities such as energy, “we have by every reasonable measure of core inflation running somewhere plus-or-minus 5 percent,” Summers said. “That is more than when [former US president] Richard Nixon put price controls in place. That is not acceptable by any dimension.”
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