One of the newest additions to the Federal Reserve’s board of governors has joined other top officials in pushing back on speculation that the US central bank will soon pause its campaign to tighten monetary policy, emphasising instead the likely need of “ongoing rate hikes”.
In her first public remarks since becoming a governor, Lisa Cook described inflation as a “near- and long-term threat” and said it was “critical” for the Federal Reserve to “prevent an inflationary psychology from taking hold”.
“In our current economy, with a very strong labour market and inflation far above our goal, I believe a risk-management approach requires a strong focus on taming inflation,” she said at an event hosted by the Peterson Institute for International Economics, a Washington-based think-tank.
“Aside from the immediate effect of higher prices on households and businesses, the longer it persists and the more people come to expect it, the greater the risks of elevated inflation becoming entrenched.”
Her comments come as financial markets have whipsawed in an effort to digest both gloomier growth prospects globally, but also emergent signs of stress. Some investors and economists have speculated the Fed will need to back off from its plans to tighten monetary policy as a result and either move far more slowly in the coming months or pause altogether.
The Fed is debating whether to deliver a fourth consecutive interest rate increase at its upcoming meeting in November, in a move that would lift the federal funds rate to 3.75 per cent to 4 per cent. Most officials forecast the benchmark policy rate reaching 4.4 per cent by year-end and 4.6 per cent in early 2023.
While the November decision will largely rest on incoming jobs data, due out on Friday, and the next inflation report set to be released next week, Fed officials have explicitly cautioned that the economic circumstances do not yet warrant the central bank pivoting from its ultra-aggressive approach.
Neel Kashkari, president of the Minneapolis Fed, on Thursday also said the Fed was “quite a ways away” from halting its interest rate increase — a message also reiterated this week by the Atlanta’s Fed’s Raphael Bostic and Mary Daly of the central bank’s San Francisco branch.
Cook, who is the first black woman to serve as a Fed governor, on Thursday backed the central bank’s decision to “front-load” its rate rises — which she said has helped to more rapidly crimp demand. Restoring price stability would not only likely require “ongoing rate hikes”, she continued, but also keeping interest rates at a level that restrain the economy “for some time”.
During a discussion following her remarks, Cook was asked about liquidity in market for US government debt, which traders have warned has been strained. The Treasury market, she said, is “functioning well” with “large volumes of trades being executed”.
While Cook emphasised that the economic effects caused by changes in monetary policy works with “long and variable lags”, she said any policy adjustments should hinge on “whether and when we see inflation actually falling in the data, rather than just in forecasts”.
At a separate event on Thursday, Charles Evans, president of the Chicago Fed, said the “momentum” in core inflation, which strips out volatile items such as food and energy, is what is most concerning to the Fed.
Economists have warned that waiting until realised inflation falls would all but ensure the Fed overtightens and causes a recession — something chair Jay Powell recently said could not be ruled out.
“Although most forecasts see considerable progress on inflation in coming years, it is important to consider whether inflation dynamics may have changed in a persistent way, making our forecasts even more uncertain,” Cook said.