The two Federal Reserve officials who voted against it spoke out again: fighting inflation delays or forces aggressive interest rate hikes in the future

The Zhitong Finance App notes that in the decision made by the Federal Reserve on Wednesday to keep interest rates unchanged, two officials who voted against it warned that if the fight against inflation is delayed too long, they may face the risk that more aggressive policy measures will be needed in the future.

Cleveland Federal Reserve Chairman Beth Hammark said in a statement released on Friday: “The longer high inflation continues, the more difficult and costly it is to bring it back to a reasonable level.”

Minneapolis Federal Reserve Chairman Neil Kashkari stated in another separate statement that in order to avoid the risk of high inflation becoming entrenched, he “preferred to gradually tighten policies while we collect more data on inflation and employment paths.”

This week, with a 9-3 vote, Federal Reserve officials decided to keep the benchmark interest rate unchanged for the fifth time in a row. However, after renewed tension in the Middle East and the huge investment boom fueled by artificial intelligence once again triggered inflationary pressure, more and more officials supported potential interest rate hikes.

Both Hamak and Kashkari have pointed to various supply-side shocks fueling the rise in inflation. Hamak said she saw that there was also pressure on the demand side of the economy. Kashkari said that just like in the late 1970s and early 80s, the Federal Reserve's tools can effectively deal with inflation caused by “continuous supply-side shocks.” Both officials pointed out that the overall economic performance is currently strong, and the unemployment rate is low.

inflationary pressure

The personal consumption expenditure (PCE) price index, the inflation indicator favored by the Federal Reserve, fell 0.1% in June, according to data released on Thursday. A report earlier this month showed a similar decline in another inflation indicator due to a sharp drop in gasoline prices. Now, economists warn that the signs of easing in inflation seen early this summer may be short-lived after a renewed escalation of the war in Iran boosted oil prices in July.

Hamak said that in her opinion, the current policy does not have the “proper austerity” to suppress price pressure, and she lacks confidence that inflation can fall back to the Fed's 2% target on its own.

“Now is the time for the FOMC to act to accelerate the return of PCE inflation to our 2% target and fulfill our commitment to price stability made to the American people,” she said.

Hamak, Kashkari, and Dallas Federal Reserve Chairman Lori Logan oppose the latest interest rate decision; they prefer to raise the benchmark interest rate by 25 basis points.

The three local Federal Reserve presidents also voted against it in April. Although they supported the decision to keep interest rates unchanged at that meeting, they opposed the language in the Fed's post-meeting statement — which suggests that the next policy move is likely to cut interest rates.

In an interview in late June, Kashkari cited the widespread inflationary pressure he saw as the reason the Federal Reserve might need to raise interest rates this year. At last month's meeting, he, along with eight other colleagues, predicted that interest rates would be raised at least once this year.

On Friday, he said that adopting fine-tuning measures could provide the Federal Reserve with more flexibility to respond to changes in the economy.

Kashkari added, “If inflation remains high, in my opinion, implementing a series of potentially marginal policy measures is better than staying on the sidelines and ultimately coming to the conclusion that more decisive action is needed.” If inflation subsides, officials can “slow down or suspend subsequent adjustments.”

Investors had previously generally expected the Federal Reserve to keep interest rates stable during the July 28-29 meeting. However, after Federal Reserve Chairman Walsh declined to explain the rationality of the decision and provided no forward-looking guidance on the conditions policymakers needed to adjust interest rates, the bond market was sold off on Wednesday, and 30-year US Treasury yields soared to their highest level in 19 years.