Federal Reserve officials played down the need to keep U.S. interest rates on hold for longer, reflecting concerns about warmer-than-expected inflation data and worries about global economic trends that could put pressure on prices.
“In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary,” Mary Daly, president of the San Francisco Fed, said on Monday in a comment at Princeton University. “Restoring price stability is our mandate and this is what the American people want. So, the FOMC remains determined to achieve that goal,” he added.
Daly’s comments followed a series of hawkish comments from other senior officials at the US central bank, reacting to economic indicators showing that US inflation is not subsidizing as quickly as expected. The US labor market also remains very strong.
They come ahead of an important month for Fed policy and economic data. Next week, Jay Powell, Fed chairman, will testify before Congress in remarks that will set the stage for the Fed’s highly anticipated policy meeting on March 21-22 including new economic projections and interest rate forecasts.
Among them, new data on inflation and the US labor market could determine whether the Fed goes ahead with a 25 basis point interest rate hike, as long expected, or is forced to be more aggressive and raise interest rates by 50 basis points. point.
“I think my colleagues agree with me that the risk of undertightening is greater than the risk of overtightening,” Neel Kashkari, president of the Minneapolis Fed, said this week at an event in South Dakota. He added that he was “open-minded” about whether to increase rates by 25 or 50 basis points at the next meeting.
Christopher Waller, governor of the Fed, said that “new data suggest that consumer spending is not slowing down much, that the labor market continues to open unsustainably hot, and that inflation is not falling as fast as I had thought”.
Waller added that he expects future data to show signs of “moderation” and “progress” in the Fed’s goal to revive the economy, but “wishful thinking does not replace hard evidence, in the form of economic data” and “we cannot risk .the revival of inflation”.
In his Princeton speech, Daly raised the possibility that some structural factors in the US and global economy may have changed in recent years to create a more inflationary environment in the post-pandemic world.
Over the past decade, a combination of globalization and technological change has kept prices and wages down, as policymakers struggle to boost employment and get inflation up to the Fed’s preferred 2 percent target.
But Daly suggests that is changing. He said one trend to watch is a decline in “global price competition”. Another is the “domestic labor shortage”, as fewer Americans seek work and immigration remains low. The third is the transition to a “greener economy, which requires investment in new processes and infrastructure”, with companies looking to pass costs on to consumers. Daly also warned of the danger that inflation expectations, which remain under control, may start to rise higher.
“If the old dynamics are overcome by other, more recent influences and inflationary pressures start to rise rather than fall, then the policy will have to do more,” he said.