Two Federal Reserve officials who voted against the central bank's decision to hold interest rates steady this week have issued warnings, suggesting that delays in combating inflation could force the adoption of more aggressive policy measures in the future.
Cleveland Fed President Beth Hammack stated in a release on Friday that "the longer high inflation persists, the more difficult and costly it becomes to bring it back to a reasonable level." Minneapolis Fed President Neel Kashkari, in a separate statement, noted that to avoid the risk of inflation becoming entrenched, he "would prefer to gradually tighten policy as we gather more data on the trajectory of inflation and employment."
This week, Fed officials voted 9 to 3 to keep the benchmark interest rate unchanged for the fifth consecutive time. However, amid renewed tensions in the Middle East and a fresh wave of demand driven by artificial intelligence-fueled investment, a growing number of policymakers are expressing support for potential rate increases.
Both Hammack and Kashkari pointed to various supply-side shocks that are fueling inflation. Hammack indicated she sees additional pressure on the demand side of the economy. Kashkari stated that, as was the case in the late 1970s and early 1980s, the Fed's tools are effective in combating inflation triggered by "a series of supply-side shocks." Both officials noted that the overall economy is strong, with the unemployment rate remaining low.
Data released on Thursday showed that the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, fell by 0.1% in June. An earlier report this month revealed a similar decline in another inflation measure, driven by a sharp drop in gasoline prices. Economists now warn that the easing of inflation seen in early summer may be short-lived, as renewed escalation of the war in Iran is pushing up oil prices in July.
Hammack expressed that, in her view, current policy is not "appropriately restrictive" enough to suppress price pressures, and she lacks confidence that inflation will retreat to the Fed's 2% target on its own. She stated, "Now is the time for the FOMC to act to accelerate the return of PCE inflation to our 2% target and fulfill our commitment to the American people for price stability."
Hammack, Kashkari, and Dallas Fed President Lorie Logan opposed the latest rate decision, preferring to raise the benchmark rate by 25 basis points. These three regional Fed presidents also voted against the decision in April. While they supported the decision to hold rates steady at that meeting, they opposed the language in the post-meeting statement, which suggested that the next policy move would likely be a rate cut.
In a late June interview, Kashkari cited broad inflationary pressures he observed as a reason the Fed might need to raise rates this year. At last month's meeting, he joined his eight colleagues in forecasting at least one rate hike this year. On Friday, he said that taking a calibrated approach would provide the Fed with greater flexibility to respond to economic changes. Kashkari added, "If inflation remains stubbornly high, in my view, a series of potential modest policy adjustments would be preferable to waiting on the sidelines and ultimately concluding that more decisive action is needed." If inflation subsides, officials could "slow or pause subsequent adjustments."
Investors had generally expected the Fed to keep rates stable at the July 28-29 meeting. However, after Fed Chair Jerome Powell declined to explain the rationale for the officials' decision and offered no forward guidance on the conditions needed for policymakers to adjust rates, the bond market experienced a sell-off on Wednesday, pushing the yield on the 30-year Treasury bond to its highest level in 19 years.
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