Even as some recent reports show underlying inflation moderating, I believe inflation remains too high. I want to reiterate that the Federal Open Market Committee (FOMC) is determined to put it on a sustainable path toward our objective of 2 percent, as measured by the Personal Consumption Expenditures price index.
Amid some signs that price pressures could be receding, a narrative has gained momentum among some commentators that the Fed should consider reversing its course of raising the federal funds rate lest we go too far and cause undue economic hardship.
While that perspective is understandable, history teaches that if we ease up on inflation before it is thoroughly subdued, it can flare anew. That happened with disastrous results in the 1970s. After the FOMC loosened policy prematurely, it took about 15 years to bring inflation under control, and then only after the federal funds rate hit 20 percent.
We don’t want a repeat, so we must defeat inflation now.
Doing so without inflicting severe economic pain is a delicate balance. But striking that balance is our job, as the Fed’s dual mandate is to pursue price stability and sustainable full employment. In the long run, the latter is not achievable without the former.
So, now we must determine when inflation is irrevocably moving lower. We’re not there yet, and that is why I think we will need to raise the federal funds rate to between 5 and 5.25 percent and leave it there until well into 2024. This will allow tighter policy to filter through the economy and ultimately bring aggregate supply and aggregate demand into better balance and thus lower inflation.
Here’s what I will need to see to consider reversing the course of monetary policy:
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A narrowing of the gap between labor supply and demand
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Higher interest rates more decisively affecting aggregate demand
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Ongoing recovery in aggregate supply
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Reduction in the breadth of…
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