The Federal Reserve building, in Washington, on Jan. 26.JOSHUA ROBERTS/Reuters
The Federal Reserve should continue to hike interest rates in bigger-than-usual half-percentage-point increments to control inflation, U.S. central bankers said on Tuesday, even as they acknowledged doing so could lead to higher unemployment.
The remarks show Fed policy-makers are, for the moment, more intent on getting a handle on price pressures than on making sure every American who wants a job can get one – or at least feel they can’t achieve the latter without doing the former.
“I think 50 (basis-point hikes) in the next two meetings makes perfect sense,” Cleveland Fed President Loretta Mester told Yahoo Finance. “It may very well be that the unemployment rate will have to move up a little bit, we may get another quarter of negative or slow growth, but that’s going to have to happen if we want to get inflation down.”
Mester, however, added that she doesn’t believe there is a trade-off between the Fed’s two goals of 2 per cent inflation and full employment “because I really fundamentally believe that if we don’t get back to price stability, we’re not going to have sustainably healthy labour markets in the future.”
New York Fed President John Williams, speaking earlier on Tuesday, agreed that the price of bringing down inflation may be a slight rise in the jobless rate, currently at 3.6 per cent and indicative of a labour market that by many measures is the strongest in 50 years.
“When I think of a ‘soft landing,’ it’s really a matter of, yes we could see growth below trend for a while and we definitely could see unemployment moving up somewhat but not in a huge way,” Williams said at an economics conference organized by Germany’s central bank in Eltville am Rhein, Germany. “I think that’s the challenge.”
Fed policy-makers are battling a surge in price pressures that has pushed inflation to a 40-year high, as demand for labour and products in the U.S. economy outstrips constrained supply made worse by COVID-19 lockdowns in China and Russia’s war in Ukraine.
A report on Wednesday is expected to show consumer prices continued to rise at an annual pace of more than 8 per cent in April.
The Fed last week raised its benchmark overnight lending rate by half a percentage point to a target range between 0.75 per cent and 1 per cent, marking the biggest rate hike in 22 years.
Fed Chair Jerome Powell signalled similar-sized increases in borrowing costs are likely at the next two policy meetings in June and July as the central bank aims to get its policy rate “expeditiously” to a neutral level of around 2.5 per cent and, if needed, beyond that level.
Remarks from Fed policy-makers since then show that Powell’s approach has broad backing.
“Once we get in the range of the neutral rate, we can then determine whether inflation remains at a level that requires us to put the brakes on the economy or not,” Richmond Fed President Thomas Barkin told a local chamber of commerce in North East, Maryland.
“We will do what we need to do.”
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