WASHINGTON: Concerns the US economy will face a downturn amid the Federal Reserve’s aggressive interest rate increases have been exaggerated, a top Fed official said yesterday.
The world’s largest economy still has a “spectacular” jobs market, and there are signs price pressures are starting to ease, Fed governor Christopher Waller said.
The central bank last month implemented the biggest interest rate increase in nearly 30 years, and signalled a similar move was possible this month as policymakers worried inflation was getting entrenched.
That fuelled an upsurge in predictions that US economy will collapse.
“I personally think some of the fears of a recession are kind of overblown,” Waller said during a fireside chat with the National Association for Business Economics (NABE).
The US is facing the highest price surge in more than 40 years – with Americans squeezed by rising costs for food, fuel and housing – made worse by the war in Ukraine.
Waller stressed that getting inflation down is the primary goal, even if that means inflicting some pain through a slowing economy.
He advocates “front loading” of rate increases, with another super-sized increase in the key lending rate later this month, followed by a big step in September, after which the central bank can move to smaller hikes depending on how inflation and the economy behave.
“I am definitely in support a doing another 75 basis-point hike in July,” Waller said.
“Probably 50 in September,” he added, “and then after that we can debate whether to go back down to 25s or if inflation just doesn’t seem to be going down, we have to do more.”
The Fed’s policy committee “is dead set on getting inflation under control”, to avoid a repeat of the 1970s, he said, referring to the period when growth flatlined amid an inflationary spiral.
“We’re not going to let that happen,” he said.
“We may have to take the risk of causing some economic damage,“ he acknowledged, but given how strong the job market is the moves are unlikely to cause “a real severe recession”.
Waller said Fed officials erred last year in thinking inflation would be transitory, and should have started taking steps sooner to prepare to remove stimulus from the economy.
“That turned out to be a kind of a big mistake” and put the Fed “behind the curve”, he said.
But the economy continues to add jobs – with Friday's report expected to show another gain in June – with unemployment at a near historic low 3.6% and two job openings for every unemployed person in the labour force.
And he said housing prices are starting to come down, and businesses are more restrained in pricing decisions, a sign the Fed’s moves are having an impact.
Waller’s comments had an immediate impact on market expectations, with investors reducing bets on the Fed hiking rates by 75 basis points in September to 13%, down from 23% before he spoke, according to an analysis of Fed funds futures contracts by CME Group, which shows an 80% probability of a 50 basis-point rise at that meeting.
Rate futures traders continue to expect a 75 basis-point hike this month.
At a separate event in Little Rock, Arkansas, St Louis Fed president James Bullard also said a 75 basis-point hike at the US central bank’s next policy-setting meeting on July 26-27 would “make a lot of sense”.
The move would bring the policy rate to a range of 2.25%-2.5%, about a percentage point short of the 3.5% level Bullard said he continues to advocate for by the end of the year. Stretched out over the three meetings left after the one this month, his view also points to a slowdown in the pace of rate increases, though he did not map that out explicitly.
Bullard likewise said that labor markets, currently nearly as healthy as they have ever been, could cool quite a bit and still remain strong, and that his “base case” is for a softish landing where growth slows from its soaring pace last year. “Some people are mistaking that for recession” he said. – AFP, Reuters