The Federal Open Market Committee should wait a little longer before reducing interest rates, Fed Gov. Christopher Waller said on Feb. 22 during a speech at the University of St. Thomas in Minneapolis.
Waller said the delay is necessary to ensure that inflation is on a sustainable path to the FOMC’s long-term 2 percent target. Month-to-month CPI inflation increased 0.3 percent in January, up from 0.2 percent in December. Inflation increased 3.1 percent on an annualized basis in January, down from 3.4 percent the previous month.
Waller said better-than-expected economic numbers reinforced his view that interest rates should not be immediately cut. Unemployment remained at 3.7 percent, which is near its lowest mark in 50 years. GDP grew at a 4 percent clip in the fourth quarter of last year.
Waller noted that strong increases in output and employment growth make a recession unlikely to soon strike, further reducing the need to immediately ease monetary policy. To him, reducing interest rates too soon would squander the FOMC’s progress in taming inflation. Waller still expects interest rates will be cut before the end of the year. Fed Vice Chair Philip Jefferson and Gov. Lisa Cook have also said they want more evidence that inflation is trending back to 2 percent before they lower interest rates.
Federal Reserve Chair Jerome Powell knows that cutting interest rates too soon places the credibility of the agency at risk, said University of Notre Dame Economics Professor Benjamin Pugsley during a question-and-answer session following Waller’s speech. University of St. Thomas Economics Professor Tyler Schipper said Powell is trying to avoid the fate of former Fed Chair Arthur Burns, who has been widely criticized for his failure to bring inflation under control during his tenure from 1970-78.
Pugsley said Powell has been trying to instill public confidence that the Fed will successfully lower inflation to 2 percent. Former Fed Chair Paul Volcker faced a lack of public confidence that the Fed would tame inflation after he was named chair in 1979. In October 1981, rates reached a record high of 18.63 percent. Recessions in both 1980 and 1981-82 were later attributed to the Fed’s tight monetary policy to fight the mounting inflation.
The 90-minute discussion was part of the “Finding Forward” conversation series co-sponsored by the University of St. Thomas, Notre Dame University and the Minneapolis StarTribune.
Political pressure remains on the FOMC to reduce interest rates, after the committee raised its target range for the federal funds rate to 5.25 to 5.50 percent from near-zero at the start of 2022. In a letter last month to Fed Chair Jerome Powell, Sens. Elizabeth Warren (D-Mass.), Jacky Rosen (D-Nev.), Sheldon Whitehouse (D-R.I.) and John Hickenlooper (D-Colo.) said the Fed’s rapid interest rate hikes resulted in higher expenses for homebuyers and renters along with a lack of new construction.
“As the Fed weighs its next steps in the new year, we urge you to consider the effects of your interest rate decisions on the housing market and to reverse the troubling rate hikes that have put affordable housing out of reach for too many,” the senators wrote.
Goldman Sachs Group economists recently pushed back their projection of when the Fed will begin cutting interest rates to June following recent comments from the central bank and after reviewing minutes from its January meeting.