Federal Reserve Bank of Cleveland President Loretta Mester said officials are fully focused on curbing inflation while her Kansas City colleague Esther George cautioned that ample U.S. savings may warrant higher interest rates to cool demand.
“Given the high level of inflation, restoring price stability remains the number one focus of the FOMC,” Mester told a virtual event Tuesday hosted by her bank, referring to the rate-setting Federal Open Market Committee. “We’re committed to using our tools to put inflation on a sustainable downward trajectory to 2%.”
The U.S. central bank lifted interest rates by 75 basis points for the fourth straight time this month, bringing the target on its benchmark rate to a range of 3.75% to 4%. Both Mester and George are FOMC voters this year.
Investors expect the Fed to downshift to a smaller, half-point increase when it gathers Dec. 13-14 meeting and for the benchmark rate to peak at about 5% next year, according to pricing of contracts in futures markets.
Previously, Mester said on Monday that monetary policy was entering a different “cadence” now that rates are at the start of restrictive territory and that she doesn’t have a problem with the Fed slowing down the pace of rate increases at next month’s meeting.
Inflation softened by more than expected in October, according to the latest readout on consumer prices, a shift that could give Fed officials more room to slow rate increases. But policymakers caution that they don’t want to read too much into one monthly report and say they want to see more convincing evidence that inflation is heading down.
On Tuesday, Mester said demand for labor is still out of balance with supply, though there isn’t evidence of a wage-price spiral that could fuel higher inflation on the scale of the 1970s.
“At this point, labor demand is still outpacing labor supply,” she said during the virtual event. But she added that “in most sectors and categories, wage growth isn’t keeping up with inflation and longer-term inflation expectations have remained reasonably well anchored so the dynamics today are different from the ’70s.”
Speaking later on Tuesday, George told a panel in Santiago hosted by the Central Bank of Chile that the distribution of U.S. savings could have implications for how high the Fed needs to raise rates.
She said that was because wealthier households tend to spend a smaller share of their wealth, though recent data suggest lower-income households are now running down their savings quickly.
“While high savings is likely to provide momentum to consumption and require higher interest rates, it’s certainly positive that we see that these households are wealthier, less financially constrained and better insured,” she noted. “But that said, reduced inflation will mean we have to incent saving over consumption.”
This article was provided by Bloomberg News.