The US Federal Reserve (Fed) is “determined to stay the course” and maintain tight monetary policy until inflation returns to the expected 2% level, even if that translates into “weak growth in 2023,” Lael said Brainard on Thursday in a speech , Vice President of the Fed.
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“Inflation has slowed in recent months, which is important for American households and businesses. But inflation remains high and it will take time to bring it down to 2%. We are determined to stay the course,” Ms. Brainard said during a speech at the University of Chicago School of Economics.
Inflation slowed to 6.5% yoy in December, reaching its lowest level in 2022 after peaking at 9.1% yoy in June.
New York Fed Chairman John Williams also said at a separate event that inflation is still too high and that cutting prices would require “a period of slow growth and weaker labor market conditions.”
If the Fed has already acted vigorously, “it is obvious that monetary policy needs to go further,” he noted, expecting GDP growth of around 1% and an unemployment rate of around 4.5% in 2023.
At its last meeting in mid-December, the Fed reduced the magnitude of its rate hikes and raised its benchmark interest rate by half a percentage point, which is now in a range of 4.25% to 4.50%.
If central bank officials plan to push it above 5% and keep it up for a while, the desire is to tighten the screw more slowly now than in the first phase.
Admittedly, the impact of the rate hike is not yet fully felt on economic activity, but Ms Brainard noted “the significant slowdown in the industrial sector” and “a further slowdown in consumer spending”.
“Net disposable income fell 4.1% in the first nine months, suggesting that current consumption is mainly driven by savings and credit,” she said.
However, household savings, particularly the smaller ones, have largely shrunk and “tightening of both monetary and fiscal policies in a global environment” is expected to result in weaker growth in 2023, Ms Brainard stressed.
However, the labor market remains subdued despite a slightly lower level of employment than before the pandemic, which Ms Brainard explains in particular by a decrease in immigration and an increase in retirements.
After all, salaries have risen significantly, but are distributed differently. The increases achieved through low wages would be compensated for “by a decline in real wages among the upper middle income earners”, which would avoid heating up the price-wage spiral feared by economists.