Will The Fed Funds Rate Continue To Go Up? Fed Officials Weigh In On How To Reduce Inflation

The Federal Reserve is back on center stage as high inflation continues to drill holes in the pockets of Americans.

What Happened

On Wednesday, the Fed released its Beige Book for September, sharing an official analysis of the economic conditions and prospects of the country.

Several key Fed figures accompanied the book’s release with speeches on Wednesday, expressing a steady rhythm of policies aimed at bringing inflation back down to stable levels with a strong commitment to monetary policies, most notably a further hike to the (already above-average) federal funds rate.

Highlights From September’s Beige Book

The Fed’s sixth Beige Book of the year reports that economic conditions across the country remain relatively stable in spite of an 8.5% annual inflation rate registered in July, way above the ideal target of 2%.

Since the Fed’s previous Beige Book in July, economic activity was on balance unchanged. 

Out of the 12 Federal Districts, five reported slight to modest growth while five reported slight to modest softening.

However, “the outlook for future economic growth remained generally weak,” said the book, with demand expected to continue downhill over the next six to 12 months.

Beige Book Key Points

• Consumer spending remained steady, but household consumption shifted away from discretionary goods toward food and more essential items.
• Manufacturing grew in several districts, but output continued hampered in many cases due to supply chain disruptions and labor shortages.
• The tourism sector reported an overall solid leisure travel activity with an uptick in business and group travel.
• Home sales fell across the country and residential construction continued to be constrained by input shortages. A drop in demand for office space caused commercial real estate activity to soften.
• Employment rose at a modest to moderate pace and employers reported improved worker retention with wages growing across all districts.
• Prices remained elevated, but price pressure dropped slightly across some districts. Shipping rates decreased as fuel prices dropped. Still, price increases were reported across districts in food, rent, utilities and hospitality services. 

Vice Chair Lael Brainard: "We Are In This For As Long As It Takes"

Fed Vice Chair Lael Brainard spoke at the Clearing House and Bank Policy Institute in New York on Wednesday, highlighting the impact that inflation causes on low-income households and stating that “we are in this for as long as it takes to get inflation down.”

“The multiple waves of the pandemic, combined with Russia's war against Ukraine, unleashed a series of supply shocks hitting goods, labor, and commodities that, in combination with strong demand, have contributed to ongoing high inflation,” explained Brainard.

The economist highlighted the importance of not only bringing inflation down but also maintaining healthy expectations.

Supply shocks to food, energy, labor or semiconductors are among the main causes for inflation, which is now a global phenomenon. While the Fed has no ability to control these variables, it has “both the capacity and the responsibility to maintain anchored inflation expectations and price stability,” said Brainard.

High demand and strong consumer spending in these supply-constrained sectors have also contributed to high inflation. However, consumer spending is in decline, partly due to a drop in real purchasing power caused by inflation itself.

In order to bring inflation back down to 2%, the country will need to experience a combination of continued easing in supply constraints, slower demand growth and lower markups against the backdrop of anchored expectations. However, there’s no data yet to predict how long this process will take.

The U.S. is not devoid of global influence. The disinflationary process in the country should be reinforced by weaker demand and tightening in many other countries, said Brainard.

“I am confident we will achieve a return to 2 percent inflation. Our resolve is firm, our goals are clear and our tools are up to the task,” concluded Brainard.

Loretta J. Mester: Fed Funds Needs To Go Above 4%

Loretta J. Mester, CEO of the Federal Reserve Bank of Cleveland, shared her insights on the Market News International Webcast, remarking that “the key challenge facing our economy is unacceptably high inflation.”

The return to price stability will take some time and a lot of fortitude, she said, adding that “there will be bumps along the road.”

A voting member of the Federal Open Market Committee (FOMC), Mester shared the consensus that an imbalance between strong demand and constrained supply is causing unusually high inflation not only in the U.S. but across most advanced economies, becoming the number one concern of businesses and households.

The FOMC is in charge of setting the federal funds rate, giving Mester’s position on monetary policy a strong weight on the economic outlook of the country.

So far, the FOMC has raised the target range of the fed funds rate by 2.25 percentage points.

In her view, the Fed still has more work to do in order to get inflation under control, and this will entail further rate increases to tighten financial conditions. Mester is proposing raising the fed funds rate to above 4% early next year and maintaining that rate throughout 2023.

These increases will result in an economic transition to below-trend growth, slower employment growth and a higher unemployment rate.

“Economic activity is beginning to slow down from last year’s robust pace,” said Mester.

The economy is responding to the FOMC’s monetary policy actions and to the tightening of overall financial conditions. 

The slowdown also reflected how households and businesses are responding to unusually high inflation, showing concerns about the economic outlook of the country.

Mester said she doesn’t believe we’re currently in a recession, because the labor market continues to be strong, though she does believe that the risks of recession over the next two years have moved up because financial conditions are tightening globally.

“Inflation is very high in many countries, global growth is slowing and the devastating war in Ukraine is adding considerable uncertainty and downside risks to the growth outlook, especially in Europe,” she said.

Michael S. Barr: Regulating Crypto For Low-Income Workers And Small Businesses

The Fed Vice Chair for Supervision Michael S. Barr spoke at the Brookings Institution in Washington, D.C. on Wednesday.

In his position at the Fed, Barr is tasked with overseeing the safety and soundness of banks in support of financial stability.

This role was created after the 2008 global financial crisis, which in Barr’s words caused a terrible recession and brought the U.S. to the brink of an economic collapse that could have been worse than the Great Depression of the 1930s.

“Financial instability unfairly harms those who are economically vulnerable, so making the financial system safer is making it fairer,” said Barr, echoing Brainard’s comments on the cost of inflation for low-income residents.

“We need to focus on access to fast, efficient digital payments,” he said, explaining that low-income households “can ill afford to wait days for their income checks to clear, nor can small businesses.”

“A three-day payment delay is an annoyance to someone with savings and ample credit, but it is a costly burden, and sometimes a serious problem for others.”

For these goals, crypto becomes a key transforming technology, allowing for instant transactions. While Barr is in favor of facilitating access to crypto technology, “crypto-asset related activity, both outside and inside supervised banks, requires oversight so that people are fully aware of the risks they face.”

Barr said his department plans to work with other bank regulatory agencies to ensure that crypto activity inside banks is well regulated.

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