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Tight Labor Market and Stubborn Inflation Plague US Economy, Says Fed Governor

A top Federal Reserve official stated his support for more interest rate hikes as a tight labor market, persistent inflation, and uncertain credit conditions continue to threaten the U.S economy.

Federal Reserve Governor Christopher Waller told the University of California Santa Barbara County Economic Summit on May 25 that the Fed should not stop raising interest rates until there is clear evidence that inflation is cooling after it unexpectedly rose to 4.9 percent last month, causing concerns over lack of progress.

Interest rates currently stand at a range between 5 to 5.25 percent after the Fed hiked rates in early May.

Fed Chairman Jerome Powell signaled that Fed funds rates may be high enough for the central to pause its money tightening to better assess the impact so far on the economy.

Policymakers are particularly concerned about the effect of rate hikes on credit conditions due to recent instability in the banking sector, but many hawks at the Fed want another round of increases.

Wallace Says Inflation Is Too High

Waller, who is a known policy hawk, wants more forceful action against inflation from the Fed due to low progress.

“I do not support stopping rate hikes unless we get clear evidence that inflation is moving down towards our 2% objective,” said Waller.

He said the latest core consumer inflation rate of 5.5 percent was “too high” and that 3.4 percent unemployment and hourly wage growth of 4.4 percent needs to drop further to reduce price pressures.

The Fed governor said he thinks that inflation will not fall enough unless average hourly earnings growth slows down to 3 percent.

Analysts are waiting for Fed officials to first release their new policy rate projections at the June meeting.

Waller said it was unlikely that the Fed would be able to determine whether inflation had reached its peak in June due to insufficient data.

He then added that the latest information from May does not provide enough clarity on how to approach the situation.

“I do not expect the data coming in over the next couple of months will make it clear that we have reached the terminal rate,” said Waller.

Wallace also said that core goods prices, which were among the biggest drivers of inflation over the past two years, have not fallen enough to get inflation down.

He said that the latest rise in home prices could counteract the Fed’s plan to bring down the consumer price index reading on inflation with lower housing costs.

Credit Markets Are a Major Factor in Another Rate Hike

Waller said that Fed officials would first do two more readings on inflation and another jobs report, along with a review of the latest credit conditions in the wake of the multiple bank failures since March.

Any change in credit conditions will play a big role in better informing his views, Waller said.

“Between now and then, we need to maintain flexibility on the best decision to take in June,” he explained.

Waller put out different scenarios for June and explained that if inflation data fails to see much improvement, then a 25-basis point hike is appropriate.

“Whether we should hike or skip at the June meeting will depend on how the data come in over the next three weeks,” said Waller.

Although another rate hike at the June 13-14 policy meeting is still in the air, an end to the central bank’s aggressive money-tightening policy is unlikely, he said.

“Prudent risk management would suggest skipping a hike at the June meeting but leaning toward hiking in July based on the incoming inflation data,” Waller added.

Credit conditions will be clearer in July, he said, and if banking conditions do not appear to have tightened excessively, “then hiking in July could well be the appropriate policy.”

However, the Fed governor warned that a rate hike, at the same time as an unexpected tightening of credit conditions, could push the economy into a deep recession.

Reuters contributed to this report.

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