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Sub-4% unemployment rate combined with soaring inflation calls for more restrictive policy, former Fed officials say.
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The Federal Reserve could signal a March liftoff of interest rates from near-zero as soon as this month's meeting as the labor market verges on full employment amid a persistent shortage of workers and inflation continues to soar, several former Fed officials and staffers told MNI.
"The stars will be well aligned for liftoff. The economy has strong momentum, the labor situation is close to full employment, and a policy rate hike would come as no surprise to markets," said former Federal Reserve Bank of Atlanta president Dennis Lockhart. " Unless we see a stark reversal of inflation trends or much worse real economy impacts of Omicron, I think it is highly likely the Fed will move in March, and will begin signaling such coming out of the January meeting."
Former Fed Board of Governors research director David Wilcox reckoned that while the FOMC may not commit to hike in March, the committee this month "will create room to have that option available to them if they decide it’s needed."
The sub-4% unemployment rate in December and record job openings and quitting rates as well as rapid wage growth are "indicative of a labor market that's quite tight," said Wilcox, an economist with the Peterson Institute for International Economics and Bloomberg Economics. "Nobody expected that within two years of reaching the highest level ever attained since the Great Depression that the unemployment rate would be below the committee’s estimate of its longer-run sustainable level. That’s astonishing."
Some Fed officials, including Tom Barkin, Raphael Bostic and Loretta Mester, have already endorsed a March liftoff for rates. Fed Chair Jay Powell pledged Tuesday to normalize monetary policy "over the course of this year," noting that the labor market has recovered "incredibly rapidly." The jobless rate is near half-century lows and "high inflation is a severe threat to the achievement of maximum employment," he warned.
Omicron and other coronavirus variants pose a downside risk for demand and overall economic activity, but Fed officials view that risk as small. The effect on the labor market was not captured in the December jobs report but may be seen in the January report. More worrying for policymakers is the inflationary impact of further factory shutdowns abroad, again disrupting supply chains that were starting to recover.
SUPPLY CHAIN SQUEEZE
Pandemic-related price hikes have proven more stubborn than most forecasters expected even as recently as three months ago and are set to run above the Fed's 2% average target for as long as the central bank maintains an accommodative stance. Faster tapering of asset purchases will give officials room to respond with an increase in rates, as MNI has reported. (see MNI: March Fed Meeting Seen Live For Liftoff, Ex-Officials Say)
"They are likely to reinforce 'mission-accomplished' on the new framework and introduce some more muscular language on the pace and duration of hikes that will start in March," said Gregory Hess, president and CEO of not-for-profit academic consortium IES Abroad, and a former visiting scholar to several Fed banks and member of the Shadow Open Market Committee.
Mickey Levy, an adviser to several Fed banks and now at Berenberg, agreed: ""The Fed is going to all but signal at its January meeting that it’s going to raise rates in March."