The Federal Reserve has the tools and responsibility to address price pressures that are "running too hot," and the central bank "has some work to do on inflation," Kansas City Fed President Jeff Schmid said Sunday.
Schmid, speaking to a credit union conference in Hawaii, did not specifically call for additional rate hikes, but said inflation is "uncomfortably above the 2% price stability target, and moving in the wrong direction."
Common narratives that have recently evolved around the nature of current inflation and the Fed's ability to contain it are off-base, Schmid said.
First, Schmid said, the view that high inflation is a reflection of repeated supply shocks neglects that "inflation is always the result of an imbalance between supply and demand. It is in the context of strong demand that a disruption to supply drives up prices. Demand always plays a role in inflation, and the Fed, through its influence on demand, always has the tools and responsibility to address inflation."
Schmid, who is not a Federal Open Market Committee voting member this year, said he also disagrees with the narrative that the sources of demand-induced inflation right now — like the artificial intelligence buildout — are resistant to Fed policy.
The Fed raised rates by a quarter-percentage point in September to 3.75%-4.00% but opted not to lift them again at last month's meeting.
After recent inflation readings came in higher than expected and comments from other Fed officials, including influential Governor Christopher Waller, interest rate futures markets are now fully priced for a quarter-point increase at December's meeting, with a small probability of a half-point hike.
"I would also push back on the idea that meeting our inflation objective requires a reaction from any particular set of prices, for example prices for AI-related technology goods," Schmid said.
"Both narratives — that inflation is being driven by either supply shocks or by demand that is impervious to higher interest rates — have a common core," Schmid said. "Mainly, that inflation is somehow beyond the Fed's power to control. I don't believe this to be true. The Fed does have the tools to address inflation and has the responsibility to achieve price stability. As Chairman (Kevin) Warsh said, we have work to do."
Fed's Collins: Gradual rate hikes best to manage risk
On Saturday, Federal Reserve Bank of Boston President Susan Collins said she supported a steady pace of modest interest rate increases because that path of action better manages economic uncertainties.
When it comes to moving monetary policy to a tighter footing, "a steady, gradual path seems appropriate to me at the moment. But I'm open-minded," Collins told reporters at a conference held by her bank on housing issues in Boston.
"I do see the risks as two-sided on the real side of the economy," Collins said, with inflation high and gains broadening throughout the economy, while the job market was stable and could accelerate.
At the same time, Collins said, there are ongoing risks of more shocks hitting the economy. Furthermore, "it's possible that the rise in medium to longer term rates that we've seen since the beginning of the year may actually weigh on demand more than I'm thinking," and serve as another source of restraint on economic activity, she said.
For now, all of that argues against the Fed shifting to a more aggressive pace of rate rises to contain inflation that has overshot the Fed's 2% target for more than five years, Collins said.
Collins cautioned that her expectation that the Fed can move gradually "doesn't necessarily mean a particular cadence." She also reiterated that the data flow from recent months has shifted, where the Fed could end up in its current tightening cycle.
"I do think that the price data we've seen over the past three months — and the labor market on a stronger footing — does make me think that the path of policy rates over the, you know, next year might be a bit higher than I had thought a couple of months ago," Collins said.
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