Fed officials say monetary policy is the right track
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Officials at the Federal Reserve believe that interest rates are inching closer to where they need to be to win the war against inflation. The remarks come after Fed policymakers increased the benchmark interest rate to between 5% and 5.25%.
Fed officials believe monetary policy is on the right track
The recent remarks were made by Fed Governor Phillip Jefferson and Fed President for St. Louis, James Bullard. The opinion provided by the two suggests that there is uncertainty over whether the Fed will pause interest rate hikes in June according to market expectations.
A third US central banker, Governor Michelle Bowman, also said that more monetary policy tightening was necessary unless inflation levels dropped by a significant margin. Over the last 14 months, the Fed has increased the benchmark interest rate by 5%, marking the fastest policy tightening in four decades.
On the other hand, inflation is showing signs of easing. Last summer, inflation levels were at 7%, but have since dropped to 4.9%. The unemployment levels have also declined to 3.4%, which is the lowest level since 1969.
Jefferson said that while inflation remained high, the evidence showed that the Fed was doing what was necessary and expected of it. The Fed targets that the inflation level drops to 2%, showing that the current figure is still significantly high.
Jefferson’s remarks are crucial as he was appointed as the next Fed vice chair by the US President, Joe Biden. The role is key in shaping the US monetary policy. The Fed Chair, Jerome Powell, has said that the central bank could pause further rate hikes as it assesses the effects of the implemented hikes. The Fed also wants to monitor the effect of the recent stress in the banking sector on lending and credit.
On Friday, Jefferson had said that he anticipated the full effects of the fast policy tightening were still expected. He argued that the influx in regional bank failures would only have a slight tightening effect based on the credit conditions.
Prospects for disinflation are still good
The St. Louis Fed President, James Bullard, has said that he found the stabilized inflation expectations were near the Fed’s 2% target, adding that the prospects for continued disinflation were good.
Bullard’s sentiments are critical as he was among the first and the most vocal policymakers that advocated for high interest rates to battle inflation. According to the central banker, the Fed’s rate hikes had helped to lower the inflation level that was increasing rapidly. Bullard opined that if the inflation levels remained unchecked, the actual inflation levels might have spiraled out of control.
Bullard also said that the monetary policy was on the low end of a restrictive era because of the current macroeconomic climate. He also added that the Fed was barely in the zone for a restrictive policy. The Fed will be meeting next between June 13 and 14 to discuss the next decision on interest rates.
