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© Reuters. Washington, D.C., U.S., July 14, 2022. REUTERS/Sarah Silbiger

By Ann Saphir

(Reuters) -The Federal Reserve Governor Christopher Waller, on Saturday, became the third U.S. central banking official to promise a “whatever-it takes” approach to combating inflation. This comes three days after the Fed increased interest rates by three quarters of a percent point and indicated more increases to come.

Waller said that “if the data come in as I expect,” he will support an equivalent-sized move at their July meeting. Waller was speaking to attendees of the Society for Computational Economics in Dallas. Waller said that the Fed was ‘all-in’ to restoring price stability.

The Fed’s inflation surge, at its highest point in 40 years has led to hawks from nearly every Fed policymaker. Only one dissented this week, against the largest rate hike in over a quarter century.

Current policymakers expect the Fed to increase its benchmark overnight rate of interest from 1.50% to 1.75% to 3.4% within the next six-months. One year ago, most people believed the rate should stay close to zero through 2023.

Friday’s Fed declaration of its inflation fight was “unconditional.” Raphael Bostic (atlanta Fed president), who has been the Fed’s most cautious policymaker declared that “we will do whatever it takes to get inflation down to the central banks’s target of 2%.”

According to the Personal Consumption Expenditures Price Index (PCEPI), inflation is at over three times this level.

Waller declared that “that’s the biggest thing I am worried about.” He also said Saturday that raising rates rapidly to the neutral level or into restrictive territory was necessary in order to reduce demand and keep inflation under control.

Waller stated that monetary tightening would likely increase unemployment from 3.6% to between 4.5% and 4.25% or higher. But his goal was to “slow the economy down.” Waller said rising concerns that Fed rate hikes would cause recession “are somewhat exaggerated.”

Waller stated that the Fed has limits on how quickly it can move. Markets could have an “heart attack”, if rates were raised by the Fed by one percent.

RISK OF OVERSHOOT

Donald Kohn, former Fed Vice-chair and Dallas Fed Vice Chair blamed high inflation partly on a decision not to tighten policy sooner. This was due to a 2020 U.S. central banking framework. The framework did not allow for raising rates to stop falling unemployment causing inflation.

Waller argued, however that the Fed’s vague promises regarding when it would stop its huge asset purchases in 2020, which were made to protect the economy against pandemic-related damage, was at fault.

He said that structural changes in the economy suggest there’s a decent chance the Fed might need to reduce its policy rate again to zero, and to buy bonds to combat a recession.

Waller indicated that next time he would be open to less stringent promises regarding the ending of bond purchases, and more information about when the Fed would tighten policy, as well as how soon. Markets should understand that if the Fed doesn’t raise rates until full employment is achieved, it must be clear to them.

Kohn for his part urged caution when rates rise enough to slow inflation. He warned that the Fed could overstep its bounds.

Kohn explained that it takes judgement and confidence to decide when to back away.

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