A senior Federal Reserve official has warned that it is far too early for the US central bank to ‘declare victory’ in its fight against high inflation after new data showed a respite in price pressures at the consumption.
In an interview with the Financial Times, Mary Daly, chair of the San Francisco branch of the Fed, did not rule out a third straight rate hike of 0.75 percentage points at the central bank’s next policy meeting. in September, although it signaled initial support for the Fed to slow the pace of its interest rate hikes.
His comments come amid intense debate over how quickly the Fed will tighten monetary policy in the second half of 2022, after raising rates at the fastest pace since the early 1980s in the first half of this year. The federal funds rate, which was close to zero in March, is now fixed between 2.25% and 2.50%.
“There is good news on the monthly data that consumers and businesses are getting some relief, but inflation remains far too high and far from our price stability target,” Daly said on Wednesday, after the latest consumer price index report showed no increase between June and July and a lower annual inflation rate of 8.5%.
Still, “core” prices – which strip out volatile items such as energy and food – rose, led by an uptick in services inflation which Daly said showed few signs of moderating.
“That’s why we don’t want to declare victory on lower inflation,” she said. “We’re not done yet.”
Daly said on Wednesday that rates are expected to reach just under 3.5% by the end of the year, a level that limits business and consumer activity. But she cautioned against acting too aggressively to dampen demand.
“There is a lot of uncertainty, so 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 September half-percentage-point rate hike was her “baseline.”
Daly pointed out that the Fed has already tightened monetary policy significantly and the full effects of these actions have yet to trickle down to the economy. Other global central banks are also rapidly raising interest rates in a “synchronized” way in a move that has significantly tightened global financial conditions, she added, while 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 end up messing up the labor market,” Daly said. turn sharply to a rate cut next year.” If we flip the economy and [people] lose jobs, so we haven’t really improved them.
So far, the labor market has shown strong momentum, with the United States adding 528,000 jobs in July. This sent the unemployment rate down to its low of 3.5% before the coronavirus pandemic.
Vacancies have started to fall from recent highs and jobless claims have fallen from very low levels, but Daly said she does not expect the jobless rate to rise too high above 4% as the Fed tackles soaring prices. Some economists have warned that the jobless rate may need to rise more than 5% if the central bank is to successfully control inflation.
When the Fed meets in September, officials will have another month’s employment and inflation figures. Daly said she would monitor these reports closely to validate whether moving to a slower pace of policy tightening is appropriate.
“What we need is not a good inflation report. It’s encouraging, but it’s not proof of the goal we really want,” she said. Instead, Daly looks to the aggregate data to argue that the Fed is “on track to significantly reduce inflation and achieve our price stability goal.”
This story has been edited from first publication to correct the number of U.S. jobs added in July to 528,000.