Top Fed official warns of risk of 1970s-style inflation

Top Fed official warns of risk of 1970s-style inflation

A “eruption work report” pushed the unemployment rate to a 53-year low of 3.4% in January, and despite persistent inflation, consumers continue to fuel the economy with solid expenses. Normally that would be great news, but St. Louis Federal Reserve Chairman James Bullard said on Wednesday that meant the fight against inflation was far from over.

Fed officials have raised interest rates eight times in the past year in hopes of cooling the economy and bringing inflation under control, and they have managed to slow rising consumer prices year-on-year, falling from a 40-year high of 9.1% in June to 6.4% last month. Fed Chairman Jerome Powell even mentioned the word “disinflation” 13 times in early February press conferenceadopting a much more optimistic tone than he did in 2022.

But Bullard warned on Wednesday that the latest labor market and retail sales data show “the U.S. economy is stronger than we previously thought,” which could lead to “a tougher road for disinflation.” in 2023″.

“Hopefully we will have disinflation in 2023, but for now, [the economic data] came hotter than we thought,” he said CNBC Wednesday, arguing that the Fed’s benchmark interest rate will have to move “north” by 5%.

While Bullard expressed confidence in the Fed’s ability to beat inflation, he also argued that authorities should raise rates aggressively now or the US economy could see a repeat of the 1970s – when year-over-year inflation hit 12%, destroying Americans’ purchasing power.

“Our risk now is that inflation doesn’t come down and pick up, so what do you do? We will have to react,” he said. “If inflation doesn’t start to come down, you risk this repeat of the 1970s…and you don’t want to get into that. Let’s be clear now, get inflation under control in 2023.”

Other members of the Fed also warned against being too lenient in the fight against inflation. Cleveland Federal Reserve Chair Loretta Mester told a conference in Sarasota last week that she sees a “compelling economic case” for faster interest rate hikes.

“It won’t always be, you know, 25 [basis points]”, she told a group of reporters, the the wall street journal reported. “As we’ve shown, when the economy demands it, we can act faster. And we can do bigger [interest rate hikes] at a particular meeting.

Later that week, Mester added at a Global Interdependence Center conference that, like Bullard, she thinks Fed officials will need to raise the benchmark interest rate above 5% and “the hold for a while” to ensure that inflation is defeated, Reuters reported.

It’s not just Fed officials who are worried about the recent string of strong economic data fueling inflation; several economists and investment advisors have expressed concern in the surprisingly resilient labor market and retail sales, arguing that they could slow down the process of disinflation. But Richmond Federal Reserve Chairman Thomas Barkin, who unlike Mester and Bullard is a member of the Fed’s interest rate setting committee this year, isn’t as worried.

“I’m not taking as many signals from the data as we have recently,” Barkin said. told reporters Friday, arguing that he would need to see “several months” of consistent inflationary data to change his mind about where interest rates should go.

Barkin doesn’t believe in raising interest rates quickly and then pausing like Bullard.

“I like [quarter-point] way because I believe it gives us the flexibility to respond to the economy as it arises,” he said, adding that it’s always “comfortable” to do more hikes from here if needed.

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