Federal Reserve Governor Lisa Cook emphasized the necessity for a delicate balance in the US Fed’s actions against inflation during her speech at a San Francisco Fed conference on Asian economic policy on Thursday.
In her prepared remarks, Cook acknowledged the challenging task ahead, stating, “I believe that a ‘soft landing’ is possible, with continued disinflation and a strong labor market, but it is not assured.” She emphasized the two-sided nature of the risks, underscoring the need to strike a balance between not tightening enough and tightening too much.
The Federal Reserve took swift action last year, raising interest rates rapidly, followed by a more measured approach this year. The most recent rate hike occurred in July, maintaining the policy rate in the 5.25%-5.50% range to assess its impact on inflation, which had reached 7.1% by the Fed’s measure last summer.
Despite the rate hikes, the economy continues to grow, and consumer spending persists. Cook expressed concern about the potential for the momentum in demand to keep the economy and labor market tight, impeding the pace of disinflation. However, signs of progress are evident, with the September Personal Consumption Expenditures index dropping to 3.4%, attributed to higher borrowing costs and supply chain improvements.
Examining the Ripple Effect of Fed’s Actions Against Inflation:
Cook highlighted challenges faced by lower-income households, which have depleted savings, and small businesses grappling with tighter credit conditions. Moreover, the actions of other global central banks tightening their policies pose an additional obstacle to achieving desired disinflation, according to Cook.
“When others are also tightening, each respective central bank may need to do a bit less to achieve the same outcomes because of these spillover effects,” she explained, noting the complexity of assessing the exact size of these spillovers in a world of uncertainty.
Navigating the delicate balance between the risks of too much or too little intervention demands a cautious approach to economic policy, Cook stressed. As the Federal Reserve maps its future course, governors like Lisa Cook will play a pivotal role in devising strategies to accomplish the challenging mission of maintaining a robust labor market while successfully bringing down inflation rates.
In the uncertain terrain of economic landscapes, only time will unveil the true ramifications of Fed’s actions against inflation, leaving analysts and stakeholders alike eagerly anticipating the unfolding chapters in the nation’s financial narrative.
Source: Reuters
