Fed Chair Waller backs another big rate hike to fight ‘all-in’ inflation


View of the exterior of the Federal Reserve Board Marriner S. Eccles building in Washington, D.C., United States, June 14, 2022. REUTERS/Sarah Silbiger

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June 18 (Reuters) – Federal Reserve Governor Christopher Waller on Saturday became the latest U.S. central bank governor to pledge a no-cost approach to fighting inflation, three days after the Fed raised interest rates by three-quarters of a percentage point and signaled more trips to come. .

“If the data comes out as I expect, I will support a move of the same size at our meeting in July,” Waller said at a conference for the Society for Computational Economics in Dallas. The Fed is ‘all in’ about restoring price stability.

Rising inflation, which is at a 40-year high, has alarmed almost all Fed policymakers, and only one of them protested earlier this week against what was the central bank’s largest rate increase in more than a quarter. a century. Read more

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Policy makers currently expect to raise the Fed’s benchmark interest rate, which is now in the 1.50%-1.75% range, to at least 3.4% in the next six months. A year ago, a majority thought the rate would need to stay near zero until 2023.

On Friday, the Fed called its fight against inflation “unconditional,” and Atlanta Fed President Rafael Bostic, the most pessimistic of the policymaker, declared, “We will do whatever it takes” to bring inflation down to 2% for the central bank. targeting. Read more

Inflation, measured by the PCE price index, has reached more than three times that level.

“This is the most important thing to me that worries me,” Waller said Saturday, adding that moving prices quickly to the neutral level and into the restricted zone is necessary to slow demand and curb inflation.

This monetary tightening is likely to push the unemployment rate, now at 3.6%, to between 4% and 4.25%, or possibly higher, Waller said, “but my goal is just to slow the economy.” He said growing fears that the Fed’s rate hike would lead to a recession, were “a bit exaggerated.”

Waller also said there are limits to how quickly the Fed can move: Markets will face a “heart attack” if the central bank raises interest rates by a full percentage point in one move.

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Speaking at the same event in Dallas, former Federal Reserve Vice Chairman Donald Cohn blamed high inflation in part on the decision to postpone his policy tightening to the framework of the US central bank adopted in 2020. That framework ruled out raising interest rates. Inflation caused by low unemployment.

However, Waller argued that the Fed’s overly specific promises about when to end its massive asset purchases, implemented in 2020 to protect the economy from the fallout associated with the pandemic, were wrong.

He said structural changes in the economy mean there is a “good chance” that in the future the Fed will need to cut its policy rate back to zero and buy bonds to fight even the usual recession.

Next time, Waller said, he will support less restrictive promises about the end of bond purchases and more clarity not only when the Fed begins to tighten policy but also how quickly. If the Fed says it won’t start raising rates until the labor market is at full employment, as it did in the last cycle, then markets must be prepared to understand that borrowing costs will rise very quickly once rates start to rise.

For his part, Cohn urged some caution once rates are high enough to start slowing inflation, warning that the Fed risks exceeding its targets.

“Knowing when to back off takes judgment and trust,” Cohen said.

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(Covering) by Anne’s editor-in-chief Paul Simao

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