Fed vows unconditional inflation war with 'whatever it takes'
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[June 18, 2022] By
Ann Saphir and Lindsay Dunsmuir
(Reuters) -The Federal Reserve, fresh from
its biggest interest rate hike in more than a quarter of a century,
signaled on Friday that the rising risk of recession will not stop its
battle to bring down searing inflation that's punishing American
households.
"The Committee's commitment to restoring price stability - which is
necessary for sustaining a strong labor market - is unconditional," the
Fed said in its twice-yearly monetary policy report to Congress,
referring to the U.S. central bank's rate-setting Federal Open Market
Committee.
"We're attacking inflation and we're going to do all that we can to get
it back down to a more normal level, which for us has got to be 2%,"
Atlanta Fed President Raphael Bostic told American Public Media's
Marketplace radio program. "We'll do whatever it takes to make that
happen."
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Three weeks ago, Bostic cautioned against overly rapid rate hikes and
said the Fed may need to pause tightening in September to assess the
economy. On Friday he said he supported this week's hefty rate increase,
and that policy needs to be "more muscular."
Inflation, measured by the Personal Consumption Expenditures Price
Index, is running at more than three times the Fed's 2% target. The
central bank on Wednesday raised the range for its policy rate by 75
basis points to 1.50%-1.75% and published forecasts showing most
policymakers support lifting borrowing costs further this year to
perhaps 3.4%, and higher in 2023.
Economists say such sharp increases could spark a recession.
The report's use of the word "unconditional," and Bostic's use of the
"whatever it takes" phrase, suggest central bankers are willing to risk
a downturn to avoid inflation getting out of control.
"We are with the American people, and trying to make sure that the pain
that is experienced, and the discomfort, is as short lived as possible,"
Bostic said.
Fed Chair Jerome Powell will update U.S. Congress members next week on
the Fed's plans to fight 40-year high inflation while pursuing maximum
employment, its two sometimes conflicting jobs.
Critics say the Fed has acted too late on inflation. Investors have been
unnerved: On Wall Street, the benchmark S&P 500 index fell 5.79% this
week, its biggest weekly drop since March 2020.
Speaking in Barcelona on Friday, St. Louis Fed President James Bullard
said he believes both the Fed and the European Central Bank "have
considerable credibility, suggesting that a soft landing is feasible" on
both continents.
He said that differed from the 1980s when Fed's fight against high
inflation under former Fed Chair Paul Volcker triggered two recessions.
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The exterior of the Federal Reserve's Marriner S. Eccles building is
seen in Washington, D.C., U.S., June 14, 2022. REUTERS/Sarah
Silbiger/File Photo
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"The Volcker disinflation was costly, but it was not credible initially -
Volcker had to earn credibility," said Bullard.
'PRUDENT STRATEGY'
Minneapolis Fed President Neel Kashkari, in an essay published on the regional
bank's website Friday, said he supported this week's rate decision and could
support another similar-sized hike in July. But he added the Fed should be
"cautious".
"A prudent strategy might be, after the July meeting, to simply continue with
50-basis-point hikes until inflation is well on its way down to 2 percent,"
Kashkari said.
Powell this week said policymakers in July will likely choose between a rate
hike of a half point hike or 75 basis points again.
Traders in futures tied to the Fed's policy rate are pricing in a year-end range
of 3.5%- 3.75%, which equates to an average increase of 50 basis points at each
of the year's remaining four meetings.
Many factors driving inflation are beyond the Fed's control, such as gummed-up
global supply chains and Russia's invasion of Ukraine which has boosted food and
energy prices.
The U.S. labor market remains strong, with unemployment at 3.6%. Fed
policymakers on Wednesday projected unemployment rising to 4.1% by 2024, as
growth slows to 1.9% and inflation falls to 2.2%, a scenario Powell said would
be hard to achieve but represents a "soft-ish" landing.
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On Friday the New York Fed published results from an economic model showing
chances of a hard landing - defined as one quarter over the next 10 where GDP
shrinks by at least 1% - are about 80%. For more on what a recession is, see.
Kansas City Fed President Esther George, who dissented in this week's policy
decision, said on Friday she thought a bigger move added to policy uncertainty
as the Fed was also beginning to shrink its massive balance sheet. Still, she
said she shares the "strong commitment to bring down inflation to achieve our
mandate for long-run price stability."
(Reporting by Ann Saphir, Dan Burns and Lindsay Dunsmuir; Editing by Paul Simao,
Chizu Nomiyama and David Gregorio)
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