20221102 fed rate hikes
Policy makers in September penciled in an eventual increase to 4.6% next year. Image Credit: AP

Washington: The Federal Reserve needs to raise interest rates significantly higher, to perhaps 6 per cent, to reduce inflation, influential monetary economist John Taylor said on Friday.

He told an economic conference in New York that rates were still “quite low” when measured in real, inflation-adjusted terms or when compared to monetary policy rules like the one he developed some 30 years ago and which bears his name.

“That’s a concern,” the Stanford University professor said via a teleconference call. “You’re not going to be able to get the inflation rate down unless you follow a policy which is similar to the policies of the past” that are set out in monetary policy rules.

The Fed’s current target range for the overnight federal funds rate is 3.75 per cent to 4 per cent. Policy makers in September penciled in an eventual increase to 4.6 per cent next year, though Chair Jerome Powell suggested last week that rates might have to go higher than that.

Taylor highlighted the risk of a wage-price spiral developing that fuels an inflation rate that is now running three times higher than the Fed’s 2 per cent target.

“One of the dangers going forward is that wages will increase and try to match the inflation rate more than they have already,” he told the conference organized by the Shadow Open Market Committee, a group of academics and former policy makers that monitor the Fed.

Former Fed Vice Chair Donald Kohn echoed that concern at the conference.

“I worry about price/wage/price interactions,” he said, adding, “how the labor market plays out is going to be key to where they raise the interest rate and how fast they can get it down.”

Kohn, who is now a senior fellow at the Brookings Institution, said it will probably take a mild recession to put inflation on a sustainable track to a range of 2 per cent to 3 per cent.

“Maybe this is wishful thinking,” he added, while stressing how uncertain the outlook is.