‘Confidence in the Fed’ has deteriorated due to raging inflation, senior official says

Two senior Federal Reserve officials have warned that a failure to tame soaring inflation will hurt the US economy, with one of them saying the situation is already a test of the central bank’s credibility.

Christopher Waller, fed the governor and James Bullard, the president of the St. Louis branch, used isolated events to insist that the central bank is committed to fighting runaway prices that have gripped nearly every corner of the economy and appear increasingly in danger of taking hold.

“Inflation is a tax on economic activity, and the higher the tax, the more it dampens economic activity,” Waller said at an event hosted by the National Business Economics Association.

“So if we don’t get inflation under control, inflation itself could lead to very bad economic consequences going forward,” added Waller, who, like Bullard, is one of the most hawkish politicians.

Most worrying is that the increased inflation — which is currently operating at its fastest pace in about four decades — will change expectations about the price outlook and keep households and businesses anticipating future growth. This risks triggering a destabilizing cycle that will lead to an even bigger inflation problem.

Everything we know about expectations [is] as soon as they come off, you lose,” Waller said. For this reason, he said the Fed was “strongly committed” to getting inflation under control.

Waller stressed that fed will not allow a repeat of the 1970s, when central bank credibility was in doubt, inflation expectations skyrocketed, and then chairman Paul Volcker was forced to sharply raise interest rates, causing widespread economic damage.

Those concerns were echoed by Bullard, who spoke Thursday at an event hosted by the Little Rock Regional Chamber in Arkansas. He warned that the economic environment is already “undermining the Fed’s credibility on its inflation target.”

With an annual rate of 4.7% as of May, the so-called. PCE core inflation — which excludes volatile items including food and energy — well above the Fed’s 2 percent target.

Waller and Bullard support the Fed’s decision to raise interest rates by another 0.75% after its monetary policy committee meets again later this month, after it raised rates for the first time since 1994 at its meeting in June.

By the end of the year, according to most officials, the base federal funds rate should hover around 3.5%, compared to the current range of 1.50% to 1.75%. This level will lead to a decrease in economic activity, said Fed Chairman Jay Powell.

The minutes of the June meeting, released on Wednesday, also suggest that rates could become “even more restrictive” if price increases are not sufficiently contained.

As the Fed decides on the trajectory of future rate hikes, it will look for clear signs of a slowdown in monthly inflation. Officials also seem more willing to make labor market sacrifices in their quest to quell inflationary pressures.

“We may have to take the risk of causing some economic pain,” Waller said Thursday, although his tense fears of a recession are “exaggerated.”

Like Waller, Bullard still sees a “good chance” of a soft landing where the Fed can bring inflation down without causing painful job losses.