Fed Execs Signaling Ongoing High Rates

Even as such high-profile economists as Janet Yellen, Paul Krugman, and Larry Summers have been saying that a so-called soft landing — reduction of inflation without a recession — was in sight, there have also been increasing signs of a bigger chance of an economic downturn. And now, multiple Federal Reserve officials are warning that interest rates could remain elevated for a long time.

U.S. growth is below the nominal federal funds rate, which is typically a bad sign. San Francisco Fed research reinforces that excess savings from pandemic emergency payments are largely gone. Credit card debt is at a new high after a pandemic reduction, food and energy prices are up, major union strikes are underway, incomes mostly didn’t stay up with rising prices that haven’t retreated, consumer confidence is down, and many of the broad public whose spending is 68% of GDP are hurting.

The Fed has said for some time that its decisions about ongoing levels of the federal funds rate that affects all interest rates depend not on warm and convenient feelings, but on practical data. Top officials have calmly been applying vague Fed-speak in what seems a coordinated effort to manage expectations.

Start with Fed Chair Jerome Powell. “‘We are still coming through the other side of the pandemic,’” Powell said, noting labor shortages in healthcare, ongoing difficulties with access to child care, and other issues heightened by the health crisis,” Reuters reported. “He did not comment on current monetary policy or the economic outlook in brief opening remarks,” but in a separate story, Reuters reported Powell saying that “restrictive policy would be needed ‘for some time.’”

It set up an ongoing acknowledgement that conditions are far from normal and did so on Monday. The same day, other officials were giving equally less than optimistic, at least in a short-term view.

Federal Reserve Bank of Cleveland President and CEO Loretta Mester gave a speech titled, A Timely Journey Back to Price Stability: Are We There Yet? No. Will We Get There? Yes. “At this point, I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that has already occurred,” she said.

Also on Monday, Fed Governor Michelle Bowman said in a speech, “Inflation continues to be too high, and I expect it will likely be appropriate for the Committee to raise rates further and hold them at a restrictive level for some time to return inflation to our 2 percent goal in a timely way.”

In other words, patience is a virtue that is best served now.