Officials say the Fed’s policy is on the right track, but inflation is still too high

PALO ALTO, Calif., May 12 (Reuters) – A pair of US central bankers said on Friday that the Federal Reserve is getting interest rates closer to where they need to be to win the battle against inflation, though neither gave a clear signal on how to that. Whether they feel they have reached this point.

A week after Fed policymakers raised the target range for the benchmark interest rate to 5%-5.25%, notes — from Fed Governor Philip Jefferson and St. Louis Fed Chairman James Bullard — point to some uncertainty about whether the Fed It will actually pause rate hikes next month, as is widely expected.

In fact, a third US central bank governor speaking earlier in the day, Gov. Michele Bowman, indicated that she feels further policy tightening might be appropriate, unless inflation falls more convincingly.

The Fed has raised the benchmark interest rate a full five percentage points in the past 14 months – the fastest pace of tightening in 40 years.

Inflation, according to the Fed’s preferred measure, has fallen from 7% last summer to 4.2%.

Meanwhile, unemployment, which had been expected to rise as borrowing costs rose, fell to 3.4%, the lowest level since 1969.

“Is inflation still too high? Yes,” Fed Governor Philip Jefferson said at the monetary policy conference at the Hoover Institution. Has the current rate of inflation been uneven and slower than any of us would like? Yes. But my reading of this evidence is that we are ‘doing what is necessary or expected’ of us, which is the dictionary definition of, he said, being ‘on the right track’.

At the same time, Jefferson didn’t ring any victory bells, offering the observation that little progress lately on core inflation, particularly in service inflation, is “bad news.” In April, core consumer prices in the US – excluding volatile gas and food prices – rose 5.5% after rising 5.6% in March.

The Fed targets an inflation rate of 2%.

Jefferson’s remarks may attract particular attention after US President Joe Biden nominated him earlier in the day to be the next Vice Chairman of the Federal Reserve, a key role in shaping US monetary policy.

Federal Reserve Chairman Jerome Powell has indicated that the central bank may hold off on further rate hikes as it assesses the impact of its previous tightening, as well as the impact of recent banking sector pressures on lending and credit.

Jefferson said Friday that he feels “the full effects of our rapid tightening are likely still ahead,” and his current view is that a series of regional bank failures will probably only have a moderate tightening effect on credit conditions. He did not give his views on a possible halt.

Very good prospects

St. Louis Fed President James Bullard, speaking at the same conference, said he finds “encouragement” that inflation expectations have recently stabilized near the Fed’s 2% target, adding that “the prospects for continued subdued inflation are very good.”

This is noteworthy from policymakers who were among the first and most vocal to push for sharply higher interest rates to fight inflation, in mid-2021.

But since then, he said, the Fed’s increases have helped lower what has been a worrying rise in inflation expectations that, if left unchecked, could cause actual inflation to spiral out of control.

“Monetary policy is now at the minimum level of what can be said to be sufficiently restrictive given the current macroeconomic conditions,” he said.

However, he said, “the bad news for the hawks in the room is that you’re hardly in the territory of a ‘restrictive enough’ policy.”

The Federal Reserve then meets to set interest rates from June 13-14.

(Covering by Ann Saffer). Editing by Diane Craft

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