Fed policy is on track, but inflation still too high, officials say

PALO ALTO, Calif., May 12 (Reuters) – The Federal Reserve is getting interest rates closer to where they need to be to win the fight against inflation, a pair of U.S. central bankers said on Friday, but neither gave a clear signal on whether they feel they have reached that point.

A week after Fed policymakers raised the target range for the benchmark interest rate to 5%-5.25%, the statements – from Fed Governor Philip Jefferson and St. Louis Fed President James Bullard – suggest some uncertainty about whether the Fed will actually pause rate hikes next month, as is widely expected.

A third US central banker who spoke early in the day, Governor Michelle Bowman, signaled that she feels further policy tightening may be appropriate unless inflation falls more convincingly.

The Fed has raised its benchmark interest rate by five full percentage points over the past 14 months – the fastest tightening in 40 years.

Inflation according to the Fed’s preferred target has fallen from 7% last summer to 4.2%.

Meanwhile, the unemployment rate, which had been expected to rise as borrowing costs rose, has instead fallen to 3.4%, the lowest since 1969.

“Is inflation still too high? Yes,” Fed Governor Philip Jefferson said at a monetary policy conference at the Hoover Institution. “Has the current disinflation been uneven and slower than some of us would like? Yes. But my reading of this evidence is that we are ‘doing what is necessary or expected’ of us,” which is the dictionary definition, he said, of being “on the track”.

At the same time, Jefferson did not ring any victory bells, offering the observation that little recent progress on core inflation, particularly in services inflation, is “bad news”. In April, US core prices – excluding volatile gas and food prices – rose 5.5% after rising 5.6% in March.

The Fed aims for 2% inflation.

Jefferson’s remarks may draw particular attention after he was nominated earlier in the day by US President Joe Biden to be the next deputy chairman of the Fed, a key role in shaping US monetary policy.

Fed Chairman Jerome Powell signaled that the central bank may hold off on further interest rate hikes as it assesses the impact of previous tightening, as well as the effect of recent stress in the banking sector on lending and credit.

Jefferson said Friday that he feels “the full effects of our rapid tightening are still ahead of us,” and his current view is that the spate of regional bank failures is likely to have only a mild tightening effect on credit conditions. He did not give his view on a possible break.

Fairly GOOD OUTLOOK

St. Louis Fed President James Bullard, speaking at the same conference, said he finds “encouraging” the recent stabilization of inflation expectations near the Fed’s 2% target, adding, “the outlook for continued disinflation is quite good.”

That’s remarkable from a policymaker who was among the first and most vocal to push for sharp rate hikes to fight inflation, back in mid-2021.

But since then, he said, the Fed’s rate hikes have helped bring down what had been a worrisome rise in inflation expectations that, if left unchecked, could have sent actual inflation out of control.

“Monetary policy is now at the low end of what is arguably sufficiently restrictive given current macroeconomic conditions,” he said.

And yet, he said, “the bad news for the hawks in the room is that you’re hardly in the zone” for restrictive enough policies.

The Fed meets next to set the interest rate on 13-14. June.

Reporting by Ann Saphir; editing by Diane Craft

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