MNI: Fed’s Cook Sees 'Two-Sided' Risks On Policy, Growth

Federal Reserve officials must balance the risk that its aggressive monetary tightening will unduly hurt the economy with the possibility that not raising interest rates enough will allow inflation to remain above the 2% target, Fed Governor Lisa Cook said Thursday.

“We need to seek a policy stance that is sufficiently restrictive to bring inflation back to 2% over time. I see risks as two sided, requiring us to balance the risk of not tightening enough against the risk of tightening too much,” she told a San Francisco Fed conference.

Strong growth and consumer spending despite more than 5 percentage points of rate hikes pose the risk that the recent pace of disinflation might not last, she said. (See MNI: Fed's Barkin Not Yet Convinced Inflation On Path To 2%)

“There is a risk that such continued momentum in demand could keep the economy and labor market tight and slow the pace of disinflation,” Cook said. “But I am also attuned to the risk of an unnecessarily sharp decline in economic activity and employment. Some parts of the economy are showing strain from tighter financial conditions.”

In particular Cook said she’s watching whether the pain being felt by small business owners, the housing sector and low- and moderate-income households “could be warning of broader stress ahead.”

There are signs the labor market is coming into better balance, Cook said, adding that a soft landing is possible but not assured.