By Lisa Pauline Mattackal
(Reuters) – The full impact of the U.S. Federal Reserve’s interest rate hikes that began in March 2022 has still not been completely transmitted to the real economy, a former vice chairman of the central bank said on Friday.
The Fed has cumulatively raised its target rate by 525 basis points to 5.25%-5.50% over the last 17 months.
“I think there’s a lot more to be seen,” Alan Blinder, Fed vice chairman between 1994 and 1996, told the Reuters Global Markets Forum (GMF).
“We’re talking about historically average lags from monetary policy to inflation of two to three years. So against that, if it’s three months or four months faster, that’s not a big deal, and suggests there’s still plenty to come,” Blinder added.
Blinder also said core inflation tends to react to monetary policy action at a slower pace than headline inflation, and that coupled with the transmission lags means the Fed should consider pausing rates for some time from here.
Inflation as measured by the Personal Consumption Expenditures (PCE) price index remains well above the Fed’s 2% target, at 3.3%, while the “core” rate, which excludes volatile food and energy prices, is 4.2%, the most recent data shows.
The ‘last mile’ of bringing inflation down may prove difficult for the Fed, Blinder said, adding that the central bank won’t be “stubborn” if inflation settles somewhat above its stated 2% goal.
“Once that first digit of core PCE gets to be 2%, while maybe the second digit is 2.8%, I think the Fed is going to start getting relaxed about inflation,” he said.
“They may conclude that the output and employment cost of getting from 2.8% to 2% is just very high,” Blinder said, adding, however, that they “won’t come anywhere close” to publicly indicating a shift in the inflation goal.
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