NEW YORK: Federal Reserve (Fed) Bank of Philadelphia president Anna Paulson says she favours holding interest rates steady and conditioned lower borrowing costs on making sustained progress on inflation.
“Policy is mildly restrictive and that restrictiveness is helping to keep inflation pressures in check, while the labour market remains stable,” Paulson said in prepared remarks for a conference organised by the Atlanta Fed.
“Keeping rates steady allows us to assess how the economy is evolving and the risks to both price stability and the labour market.”
She said the unemployment rate has been “remarkable steady” pointing to a labour market “approximately in balance”, while inflation was too high even before the war on Iran caused a surge in energy prices.
“Assuming the labour market remains in balance, rate cuts would only become appropriate once we have seen sustained progress on inflation,” she added.
The Fed held interest rates steady last month, with some officials pointing to heightened uncertainty around the economic impacts of the war in Iran.
Three policymakers, however, dissented, saying they supported holding rates steady but opposed wording in the post-meeting statement that signalled the next rate move was likely to be a cut.
In recent days, global bond yields have jumped as investors reacted to another surge in energy prices and placed higher odds on the possibility of rate hikes in the coming months.
“I think it is healthy that market participants have taken on board scenarios where the funds rate remains unchanged for an extended period, as well as scenarios where further tightening becomes necessary,” Paulson said.
During a question-and-answer session following her speech, Paulson said she believed much of the recent movement in longer-dated bond yields was being driven by a perceived rise in “real rates” and not by higher inflation expectations.
In her prepared remarks, she said she expected the labour market to remain stable and price pressures to “gradually return” to 2%.
Yet risks to inflation mandate “have increased”, she added.
The path ahead, she emphasised, depended largely on how long the war disrupted supplies of oil and other goods.
“If the conflict in the Middle East is resolved soon, and shipping and oil production return to normal quickly, inflation and inflation risks are likely to subside relatively quickly,” she said.
“If it takes more time to resolve, inflation and inflation risks, along with risks to the labour market, are likely to be elevated for longer.”
The Philadelphia Fed chief, who votes on policy decisions this year, also pointed to challenges families face in dealing with elevated energy prices, frequently trading down from premium to cheaper brands and some households relying more on credit cards to maintain their spending levels.
Despite such strains, she said, overall spending had remained resilient.
“While many families are feeling stretched by inflation, there are few signs that consumers are pulling back sharply in the aggregate,” she said. — Bloomberg
