Former vice chair Blinder suggests that the actual consequences of Federal Reserve rate hikes on the real economy are yet to be fully witnessed.

A former vice chairman of the U.S. Federal Reserve has stated that the full impact of the central bank’s interest rate hikes, which began in March 2022, has not yet fully affected the real economy. Alan Blinder, who served as Fed vice chairman from 1994 to 1996, believes that there is still more to come from these rate hikes. He explains that historically, there is a lag of two to three years between monetary policy and inflation, so if the impact is felt a few months earlier, it is not significant. Blinder also notes that core inflation responds at a slower pace than headline inflation, and therefore, the Fed should consider pausing rates for some time. Currently, the Personal Consumption Expenditures price index shows inflation at 3.3%, well above the Fed’s 2% target, while the core rate is 4.2%. Blinder suggests that once the core PCE reaches 2%, the Fed may become more relaxed about inflation, as the cost of bringing it down further may not be worth it. However, he does not believe that the Fed will openly indicate a shift in the inflation goal.