One of the Federal Reserve’s newest board members on Wednesday said the central bank is on track to keep raising interest rates because “inflation remains much too high.”
Lisa Cook, who joined the Fed board earlier this year, said inflation appears to be slowing from a 40-year high. She pointed to softening in consumer and producer prices in October.
“We have begun to see some improvement in the inflation data,” she said in a speech to the Detroit Economic Club. “Nonetheless, I would be cautious about reading too much into one month of relatively favorable data.”
Cook also stressed that wages are still rising too rapidly and that inflation in the service side of the economy — travel, recreation, entertainment — poses a longer-term threat.
Services “make up about two-thirds of consumer spending, and inflationin that sector has not yet slowed,” she said.
Rising wages would not pose as much of a problem, Cook said, if productivity weren’t so weak. Higher productivity allows companies to do more with less and raise worker wages more even while maintaining profits.
“But wage growth remains above what would be consistent with 2% inflation, givenprevailing trends in productivity growth,” she said. Wages are rising almost 5% a year.
The Fed is trying to douse the biggest outburst of U.S. inflation in four decades. The annual increase in prices jumped to as high as 9.1% last summer before tapering off to 7.7% as of October, according to the most recent consumer price index.
Inflation averaged less than 2% a year in the decade preceding the pandemic.
Cook did not give an indication of how much the Fed should raise a key short-term U.S. interest rate at its next big meeting in December, but she indicated it will eventually “be prudent to move in smaller steps.”
Wall Street increasingly believes the Fed will deliver a 1/2-point rate hike after three straight increases of 75 basis points.
The central bank has raised its benchmark fed funds rate to a top end of 4% from near zero in the spring. The rate is likely to rise to around 5%, analysts believe, before the Fed pauses to determine its next steps.
Higher rates typically slow the economy by making it most costly for businesses and consumers to borrow. Soaring mortgage rates, for example, have already caused home sales to slump.