A top Federal Reserve official has warned that it is far too early for the US central bank to “declare victory” in its battle against high inflation, after new data showed a reprieve from consumer price pressures.
In an interview with the Financial Times, Mary Daly, president of the Fed’s San Francisco branch, did not rule out a third consecutive 0.75 percentage point rate hike at the central bank’s next policy meeting in September, although she expressed her initial support for the Fed to slow the pace of rate hikes.
Her comments come amid intense debate about how quickly the Fed will tighten monetary policy in the second half of 2022, following the rate hike at the fastest pace since the early 1980s in the first half of this year. The Federal Funds interest rate, which was close to zero in March, is now set between 2.25 and 2.50 percent.
“There’s good news on the month-to-month data that consumers and businesses are getting some relief, but inflation remains way too high and not close to our price stability target,” Daly said Wednesday, after the latest consumer price index report failed to pick up. between June and July and a slower annual inflation rate of 8.5 percent.
Still, “core prices” — which omit volatile items like energy and food — rose higher, led by a rise in services inflation that Daly said showed little sign of moderation.
“This is why we don’t want to declare victory over falling inflation,” she said. “We are far from done.”
Daly insisted on Wednesday that rates should rise to just under 3.5 percent by the end of the year, a level that is limiting business and consumer activity. But she warned against acting too aggressively to dampen demand.
“There is a lot of uncertainty, so I am jumping forward with great confidence that [a 0.75 percentage point rate rise] is what we need and being prescriptive would not be an optimal policy.” She explained why a half percentage point rate hike in September is her “baseline.”
Daly pointed out that the Fed has already tightened monetary policy significantly and that the full effects of those measures have not yet filtered through to the economy. Other global central banks are also rapidly raising interest rates in a “synchronized” manner, to an extent that has dramatically tightened global financial conditions, she added, as growth prospects in advanced and emerging economies have deteriorated.
“We have a lot of work to do. I just don’t want to do it so reactively that we find ourselves spoiling the job market,” Daly said. She pushed back investor expectations that the Fed will abruptly cut interest rates next year. “If we turn the economy around and [people] losing jobs, we haven’t really made them any better.”
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So far, the job market has registered strong momentum, with the US adding 582,000 jobs in July. That pushed the unemployment rate back to its pre-corona pandemic low of 3.5 percent.
Job vacancies have started to fall since recent highs and unemployment claims have risen from a very low level, but Daly confirmed she doesn’t expect the unemployment rate to rise too far above 4 percent as the Fed tackles rising prices . Some economists have warned that the unemployment rate may need to rise by more than 5 percent for the central bank to succeed in curbing inflation.
When the Fed meets in September, officials will have another month’s job and inflation data. Daly said she would closely monitor those reports to validate whether it is appropriate to shift to a slower pace of policy tightening.
“What we need is not a good report on inflation. It’s encouraging, but it’s not proof of the goal we really want,” she said. Instead, Daly looks at the aggregated data to confirm that the Fed is “on track to significantly lower inflation and meet our price stability target”.