Fed officials stress importance of tackling high inflation

Still elevated: Customers in a US discount retail store. Officials say the interest-rate increase is clearly needed to rein in an economy running hotter than anticipated. — AFP

NEW YORK: Three Federal Reserve (Fed) policymakers have expressed confidence in the actions taken to bolster the financial system and stressed the need to curb high inflation despite concern over banking strains.

Echoing chair Jerome Powell’s determination to restore price stability, the officials said the interest-rate increase was clearly needed to rein in an economy running hotter than anticipated.

St Louis Fed president James Bullard also said that he now forecasts raising rates to 5.63% this year, which is 50 basis points more than the median projection of his colleagues.

“Inflation is high. Demand hadn’t seemed to come down. And so, the case for raising was pretty clear,” Richmond Fed president Thomas Barkin was quoted as saying in an interview with CNN.

Bullard and Atlanta Fed chief Raphael Bostic acknowledged the recent turmoil in the banking sector during remarks at separate events, but both spelled out that monetary policy should stay focused on lowering inflation.

“Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation,” Bullard said in St Louis.

“I just think this is a different world than the 2007 to 2009 world where you’re inventing things on the fly,” he said, adding: “Here you have the tools in the toolbox,” while the inflation problem “is real and is large.”

Policymakers lifted their benchmark rate by a quarter point last Wednesday, continuing their battle against stubbornly high inflation despite lingering uncertainty over how much the domestic economy will be upended following the second-biggest bank failure in US history.

The move comes after the US government stepped in to guarantee deposits at two failed firms and after the Fed introduced a new emergency lending programme meant to backstop other banks. The Fed also worked to boost international access to dollars by enhancing swap lines with its key central bank counterparts.

Bullard, who does not vote in monetary policy decisions this year, said he expects the financial stress to be contained and he raised his outlook for how high rates will need to go this year to 5.63%.

“I had previously been at 5-3/8, now I’m at 5-5/8, so a little bit higher – 25 basis points higher – in reaction to the stronger economic news,” he told reporters via conference call Friday after a speech.

The Fed’s so-called “dot plot” of rate forecasts indicated that two other officials shared Bullard’s estimate of 5.63%, and one was higher at 5.88%.

Such forecasts are roughly two percentage points higher than where traders are betting Fed rates will be in January.

“There could be a downside scenario where financial stress gets worse, but I didn’t make that my base case,” Bullard said. — Bloomberg

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