Former Federal Reserve Chairman Ben Bernanke, who guided the central bank during the Great Recession, recently released a paper stating that the Fed still has work to do in controlling inflation. Bernanke, along with former International Monetary Fund Olivier Blanchard, believes that labor market slack is still below sustainable levels and inflation expectations are slightly higher, making it necessary for the Fed to bring inflation back on target. Despite inflation cooling down in recent months, some Fed officials argue that it isn’t happening fast enough.
According to a new study co-authored by Bernanke, the labor market is a bigger driver of inflation and may be the cause of persistent price pressures that can only be ameliorated by a downturn. The study found that commodity markets saw a rise in inflation in 2021, and the inflationary pressures continued to increase throughout the year until the Fed began raising rates from near-zero in March 2022. Although the central bank has made progress since its 10th straight rate hike, bank stress surfaced earlier this year as inflation slowed, raising concerns about the impact of the Fed’s aggressive rate hike campaign.
Currently, the debate over whether to raise interest rates again or suspend them is heating up. Data gauging labor market conditions in the coming weeks and the CPI report due at the Fed’s two-day meeting in mid-June will give officials more information on whether to raise rates further or stop them. Officials will also consider credit conditions and the delayed impact of tightening monetary policy, which could further dampen demand.
San Francisco Fed President Mary Daly stated that the time is approaching when higher interest rates will begin to have a noticeable impact on the broader economy, and we must pay close attention to the slowdown in accumulated interest rates. “Add to this the tightening of credit that we’ve seen, and it means a lot of factors are pulling the reins on the economy, and that’s why we have to rely so heavily on data. If you tighten too much when it’s not coming, you can easily have an overtightened unforced error,” said Daly.
In conclusion, the Fed still has work to do in controlling inflation, and the labor market may prove to be the cause of persistent price pressures. Data gauging labor market conditions and the CPI report will provide officials more information on whether to raise interest rates further or stop them, and they will also consider credit conditions and the delayed impact of tightening monetary policy.