Fed officials say rates may need to go higher to tame inflation

California: Two Federal Reserve officials said the central bank may have to raise interest rates further to tame price pressures that in some sectors aren’t showing much sign of easing.

Fed Governor Christopher Waller said Friday headline inflation has been “cut in half” since peaking last year, but prices excluding food and energy have barely budged over the last eight or nine months.

“That’s the disturbing thing to me,” Waller said during a question-and-answer session following a speech in Oslo, Norway. “We’re seeing policy rates having some effects on parts of the economy. The labor market is still strong, but core inflation is just not moving, and that’s going to require probably some more tightening to try to get that going down.”

At a separate event Friday, Richmond Fed President Thomas Barkin said inflation remained “too high” and was “stubbornly persistent.”

“I want to reiterate that 2 per cent inflation is our target, and that I am still looking to be convinced of the plausible story that slowing demand returns inflation relatively quickly to that target,” Barkin said in a speech in Ocean City, Maryland. “If coming data doesn’t support that story, I’m comfortable doing more.”

The Federal Open Market Committee paused its series of interest-rate hikes Wednesday, but policymakers projected rates would move higher than previously expected in response to surprisingly persistent price pressures and labor-market strength.

Chicago Fed President Austan Goolsbee said Friday the pause would allow officials time to assess how their policy is impacting the economy.

“I think of it as a reconnaissance mission, pausing now, to go scope it out before charging up the hill another time,” Goolsbee said in an interview with NPR.

Barkin warned that prematurely loosening policy would be a costly mistake.

“I recognize that creates the risk of a more significant slowdown, but the experience of the ‘70s provides a clear lesson: If you back off inflation too soon, inflation comes back stronger, requiring the Fed to do even more, with even more damage,” he said. “That’s not a risk I want to take.”

Policy report

Separately, the Fed released a new report Friday that said tighter US credit conditions following bank failures in March may weigh on growth, and that the extent of additional policy tightening will depend on incoming data.

“The FOMC will determine meeting by meeting the extent of additional policy firming that may be appropriate to return inflation to 2 per cent over time, based on the totality of incoming data and their implications for the outlook for economic activity and inflation,” the Fed said in its semi-annual report to Congress.

The Fed report, which provides lawmakers with an update on economic and financial developments and monetary policy, was published on the central bank’s website ahead of Chair Jerome Powell’s testimony before the House Financial Services Committee on June 21. He will appear before the Senate banking panel the following day.

“Evidence suggests that the recent banking-sector stress and related concerns about deposit outflows and funding costs contributed to tightening and expected tightening in lending standards and terms at some banks beyond what these banks would have reported absent the banking-sector stress,” the report said.