The Atlanta Fed president warned that if the Fed eases policy prematurely, it will have dire economic consequences similar to those seen in the financial crisis of the 1970s. He noted that “inflation is still too high,” and emphasized that ” He stressed that “we must overcome inflation now because we do not want to repeat the same thing.
Fed officials on raising interest rates and fighting inflation
Federal Reserve Bank of Atlanta President Raphael Bostic warned of “dire” economic consequences if the Fed loosens policy prematurely in an essay released Wednesday by the Atlanta Fed.
“I think inflation remains too high,” he wrote, emphasizing the need for the Federal Open Market Committee (FOMC) to raise interest rates more aggressively. Bostic opined that the Federal Reserve should consider “shifting its policy of raising the federal funds rate so as not to go too far and cause undue economic hardship.”
While this view is understandable, history teaches us that easing before inflation has fully settled can cause inflation to flare up; it did so in the 1970s, with disastrous consequences, and the FRB has been unable to do anything about it.
The president of the Atlanta Fed warned, “It took about 15 years to get inflation under control after the FOMC eased policy prematurely, and that was after the Federal funds rate reached 20%.” We must beat inflation now because we do not want to repeat the same thing.”
Bostick continued, elaborating, “Now we must determine when inflation will be irretrievably low.”
We have not gotten there yet. That is why I think we need to raise the federal funds rate to between 5% and 5.25% and keep it there until 2024.
“This will allow the tightening policy to permeate the economy and ultimately lead to a better balance between aggregate supply and aggregate demand and thus lower inflation.”
Minneapolis Federal Reserve Bank President Neel Kashkari also spoke about raising interest rates at a business event in Sioux Falls on Wednesday. Kashkari said he is “open minded” about whether the Fed will raise rates by 25 or 50 basis points at the next FOMC meeting. Citing last month’s “better-than-expected inflation and strong employment data,” Kashkari said.
These are worrisome data points that suggest we are not progressing as quickly as we would like.
But he cautioned against overreacting to “one month of data, even if the data is troubling.”
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