MNI INTERVIEW: Too Soon To Say Inflation Peaked- Fed’s Wright

It’s too early to say whether U.S. inflation has peaked at near 40-year highs and the Federal Reserve must keep raising interest rates in order to make monetary policy modestly restrictive, St. Louis Fed economist Mark Wright told MNI.

“It’s still far too soon for us to be confident that inflation has peaked and we need to remain vigilant,” said Wright, a senior vice president at the regional central bank, in an interview. “The inflation situation is still very troubling – the numbers are much too high.”

While the recent moderation in some price categories had been “slightly” encouraging, he noted that it was driven by volatile energy components.

“I don’t think we can take terribly much confidence from the movements in commodity prices,” said Wright, recently research director at the Minneapolis Fed. “We need to be focused on getting those core numbers back down.”

Wright thinks inflation will likely move sideways for the rest of the year. “I think that’s a reasonable projection now based on what we know,” he said.

Core CPI jumped 0.6% in August alone, raising eyebrows at the central bank and reaffirming the Fed’s resolve to remain aggressive in its rate hiking campaign. Wright would like to see monthly gains in core prices come in at about 0.15% for the rest of the year, trending down to about 0.1%.

A COUPLE OF YEARS

The central bank raised rates by 75 basis points for a third meeting in a row last week, and sharply revised up its median outlook for the peak in interest rates to 4.6%.

“The Fed median projection is to get short run interest rates to about 4.5% and keep them there for the next couple of years,” said Wright. “And that’s over a horizon in which we think inflation is going to be getting down towards 3 and then eventually down towards 2. That means real short-run interest rates over that period are going to average about 1.5%. That’s modestly restrictive.” (See MNI INTERVIEW: Fed's Bullard-Rates Could Be 'Higher For Longer')

Echoing Fed Chair Powell’s comments at the latest press conference, Wright said the Fed would need to slow the pace of hikes at some point.

“We’re clearly not going to continue to raise rates 75 basis points a meeting, meeting after meeting after meeting,” he said. “There’s just not that many more increases in us as long as it continues to evolve as we expect that it will.”

Wright thinks the economy can still avoid a recession and unemployment will rise only modestly, as suggested by the Fed’s September SEP. “That means the unemployment rate would rise slightly above its long-run natural rate,” he said. “A modest slowdown – that’s what we’re looking for.”

NO WAGE SPIRAL

Wright said he takes comfort in well-anchored inflation expectations and argues the risk of a wage-price spiral seems fairly remote.

“I’m not overly worried about the wage situation. What we’re seeing typically speaking is that wages are struggling to catch up with inflation,” he said.

“I’m not seeing indications that wage negotiations are looking out much further,” Wright added. “I would be very concerned if we were seeing workers and unions were negotiating ongoing wage increases that were at and above what we’re seeing currently with inflation.”