An official at the US Federal Reserve (Fed) on Saturday advocated that the institution continue to hike interest rates sharply until inflation actually falls. The Fed hiked rates 0.75 point in late July, a much larger hike than the usual quarter point.
“Similar hikes should be considered until inflation falls consistently, significantly and sustainably,” Fed Governor Michelle Bowman told the Kansas Bankers Association.
“It is absolutely essential that we continue to use our monetary policy tools until we manage to bring inflation back to our 2% target.”She added.
Inflation reached 6.8% in June according to the Fed’s favorite PCE index over a year and 9.1% according to the CPI index. Michelle Bowman discussed “a significant risk of high inflation next year for basic needs, including food, shelter, fuel and vehicles”. Especially since the labor market with a shortage of workers remains tight. However, “One aspect of the labor market that hasn’t recovered is participation”the governor states: “Almost four million people (in) always missing”.
The labor market showed unexpected momentum in July and the country has now regained the 22 million jobs destroyed by the pandemic, while the unemployment rate has fallen to 3.5%, as in February 2020. However, the participation rate remained stable at 62.1% in comparison to 63.4% in February 2020.
No recession in sight
The job market should remain “Celebration” despite the Fed’s rate hike, says Michelle Bowman, who nevertheless warns against it“a risk that our measures will slow down job creation or even reduce employment”. However, she finds it “The biggest threat to the strength of the labor market is excessive inflation”what could lead to it “a prolonged period of economic weakness combined with high inflation, such as (…) in the 1970s”.
The decline in GDP in the first two quarters of 2022 “Perhaps this is an indication that our measures (…) have the desired effect”. She doesn’t anticipate a recession, however “A Resumption of Growth” in the second half, followed by“moderate growth in 2023”. Fed interest rates are between 2.25 and 2.50%.