MNI INTERVIEW: Fed Will Likely Hike Rates Above 6%-Plosser

The Federal Reserve will need to raise interest rates by at least another full percentage point in order to contain inflation pressures that remain out of its control, former Philadelphia Fed President Charles Plosser told MNI.

“I’ve said for a long time that I thought rates would have to get over 6% and I still believe that. It may be that it takes more than that,” said Plosser, an FOMC member from 2006 to 2015.

He said the Fed’s decision last month to hold interest rates rates steady at 5-5.25% while policymakers revised up their views of the terminal fed funds rate to 5.6% was a confusing way to delay the inevitable.

“I worry they’ve undermined their own credibility. The decision conveyed a potential lack of seriousness or commitment to the task at hand,” said Plosser, who is widely published in monetary policy scholarship and was seen as a hawk during his time as a policymaker.

The decision to pause smacks of an undue obsession with consensus, he said. It would have been better to see dissents than for policymakers to effectively express their general disagreements with the policy action through rate forecasts in the Summary of Economic Projections, he said.

“Core inflation is still elevated and doesn’t seem to be diminishing a lot. To get from there to 2% is going to take a lot more perseverance,” he said.

Headline PCE inflation eased to a two-year low of 3.8% in May but the core measure remains at a still-hefty 4.6%, reflecting stubborn underlying inflation accompanied by a tight labor market that shows scant signs of cooling. CPI data released Wednesday sent a similar message, with headline dropping to 3% but core sticking at 4.8%.

BARELY RESTRICTIVE

Plosser said policy cannot be considered very restrictive yet because real interest rates only recently became positive.

“That didn’t happen until earlier this year. Why they think that’s enough is beyond me. I don’t think it’s that restrictive,” he said.

Fears that the regional banking turmoil in March would lead to a credit crunch have proven overdone as well, he said.

“I don’t see the reason for backing off that much in terms of their actions to get inflation under control.” (See: MNI INTERVIEW: Resilient Jobs Mean Fed Can Tighten More-Kamin)

FAR AND WIDE

Plosser said no one particular driver of inflation was most worrisome but rather the breadth and persistence of the trend across industries and goods.

“The problem is that once inflation gets a foothold it’s very hard to reverse it. Once it spreads to many different sectors it becomes a lot harder to chip away at,” he said. “It’s a huge mistake to focus on relative prices, the prices of lumber, or used cars, that’s not the issue. What you’re afraid of is the breadth of the price increases, that’s when you find yourself behind the curve.”

The Fed’s reluctance to raise interest rates until March 2022 even though inflation started to spike in the summer of 2021 meant that officials found themselves behind the curve, and were thus forced to move more abruptly and intensely.

The decision to pause in June raised the prospect that officials are making the same mistake again – and will have to do more tightening in the future in order to make up for additional lost ground.

This raises the prospect of worse outcomes for the economy, including a possible jump in unemployment and a deeper downturn in growth than is currently forecast, he said.