Former Fed governor Randall Kroszner warns against dismissing more interest rate increases. He advised all to anticipate further interest rate hikes.
Kroszner, currently a professor at the University of Chicago, expects high rates to persist into next year. He speaks on CNBC’s “Fast Money” and questions halting rate hikes amid a robust labor market.
Notable for his role in responding to the global financial crisis, Kroszner forecasts the Fed will postpone reducing interest rate hikes until labor market strains abate.
His statements followed the unveiling of minutes from the Fed’s July policy discussion. The released minutes revealed that Fed officials mentioned the possibility of “upside risks” in inflation, which might prompt them to implement additional rate hikes.
The ‘Upside risks’ to inflation measure for more interest rate hikes
Released minutes showed Federal Reserve officials expressing unease about inflation’s speed and considering future interest rate hikes.
Minutes from the session also disclosed that Federal Reserve officials discussed heightened inflation concerns. A quarter-point rate hike was enacted following the July meeting, commonly anticipated as the cycle’s conclusion.
Nevertheless, conversations indicated that most members remain concerned about ongoing inflation and potential further tightening actions by the Federal Open Market Committee.
The meeting summary stated that most participants foresee substantial upward inflation risks due to high inflation and a tight labor market. Additional tightening of monetary policy might be necessary.
Despite certain members’ post-meeting views on potential interest rate hikes, caution was advised in the minutes. Officials highlighted pressure from various factors and emphasized data-driven future choices.
Participants emphasized the need for a suitably tight monetary stance to achieve the Committee’s 2% inflation target. Significant uncertainties about the future policy trajectory were evident from the minutes.
It is worth noting that the recent interest rate hike raised the federal funds rate, the Fed’s main borrowing level, to 5.25%-5%, the highest in over 22 years.
Uncertainties
The minutes indicated significant concerns about the future policy direction, revealing notable uncertainties. While consensus formed around “unacceptably high” inflation, some signs suggested easing inflation pressures. Nearly all participants, including non-voting members, favored the rate increase, but dissenters recommended observing previous hikes’ effects.
The minutes also highlighted participants’ considerable uncertainty about the impact of prior monetary policy tightening on the economy. It also pointed out that the economy was anticipated to decelerate, potentially leading to a modest increase in unemployment. However, the initial prediction of a possible mild recession in the current year due to banking sector issues was later withdrawn by staff economists.
Employment concerns
Employment growth has slightly slowed yet remains strong, with a 3.5% unemployment rate in July, near its lowest point since the late 1960s. Although slightly reduced from record highs, job openings still greatly outnumber available workers.
Some recent statements from Federal Reserve officials suggest that while rate cuts are unlikely this year, there may not be further increases either. Market data from CME Group indicates less than a 40% chance of another interest rate hike before the year’s end.
Commercial Real Estate Concerns
Concern arose about issues in commercial real estate, especially risks linked to potential sharp declines in valuations. Officials highlighted potential adverse effects on banks and financial institutions heavily exposed to CRE, such as insurance companies.
Some nonbank financial institutions, including money market funds, were noted to be susceptible to CRE-related risks. Members stressed the dual risks of quick policy loosening leading to higher inflation and excessive tightening, causing economic contraction.
Recent data indicates marked progress in inflation, despite it remaining distant from the central bank’s 2% target. Inflation, which peaked above 9% in June 2022, has shown substantial improvement in recent figures.
The concern over commercial real estate centered on potential value drops affecting banks and financial entities. The cautious approach to policy focused on avoiding rapid loosening that might raise inflation or excessive tightening, causing contraction.
Additional issues making Feds Job a little difficult
As the fall approaches and students prepare for school, the Federal Reserve is also attentive to revived consumer confidence, Kroszner noted. With the resumption of student loan repayments and the start of the back-to-school period, Kroszner highlighted the Fed’s focus on consumer confidence.
Kroszner also highlighted that while consumer resilience is positive, it adds complexity to the Fed’s task, requiring diminished vigor to halt interest rate hikes.