A top US Federal Reserve official has warned that interest rates may need to rise higher, even as the Fed has already raised interest rates at a historic pace over the past year and a half.
Susan Collins, the president of the Boston Fed, said in an interview with US media on Thursday that she was surprised by the US economy’s resilience, noting a still-tight labor market and strong consumer spending, despite the Fed’s previous increases.
“I am not yet seeing the slowing that I think is going to be part of what we need for that sustainable trajectory to get back to 2% [inflation] in a reasonable amount of time,” Collins said, referring to the Fed’s long-standing goal of 2% year-over-year (YoY) inflation.
Collins also told the outlet that she has not made a decision on a rate hike ahead of the upcoming September Federal Reserve Policy meeting but stressed that the central bank needs to be patient as it weighs financial policies.
She added that it is possible that the Fed has reached a level that could “hold for some time,” but stressed that did “not imply [...] that there is not a very real possibility that we will need to make additional increments.”
In July, inflation for all items YoY was at 3.2% with food items being particularly expensive, rising 4.9% since this time last year.
The economy is still showing signs of strength, despite the consistent Fed rate hikes, which have raised rates from near zero in March 2022 to 5.25-5.5% at present.
Federal Reserve officials are expected to engage in a heated debate on whether more interest rate hikes are needed to further cool the economy.
Already, mortgage rates have hit their highest point in the past 20 years, according to Freddie Mac.
There are other methods governments can use to tame inflation. In 1971, US President Richard Nixon instituted a price and wage freeze with some initial success (later attempts in 1973 were less successful). More recently, US Sen. Bernie Sanders (I-VT) proposed a 90% windfall tax on corporations to fight price gouging.
An analysis by the Institute for New Economic Thinking found corporate profit margins rose 42% from the first quarter of 2020 to the second quarter of 2022, while the price of producing those goods only rose 16%.
This indicates wage increases are not eating into corporate profits and are not a significant cause of price increases, but instead that companies took advantage of small inflation gains to justify price increases far above what was necessary. A windfall tax would discourage companies from such price gouging.
While rate hikes are generally effective at reducing general consumer spending, they are less effective at limiting spending by wealthy consumers who buy goods using credit far less often. According to the same study, 40% of the increased demand comes from the top 1% of consumers and 75% comes from the top 10%.
The wealthiest Americans profited handsomely from the quantitative easing the government instituted in response to the COVID-19 pandemic, money that they are now busy spending. Increasing taxes on the rich, rather than interest rates, could be a more effective method of reducing consumer spending from that financial group.
However, these methods of fighting inflation are not in the hands of the Federal Reserve. Congress is in charge of federal tax rates and the executive branch would need to authorize any price or wage controls.
The next Federal Reserve policy meeting is scheduled for September 19-20. The last meeting, held in July, saw a 25 basis point (0.25%) increase in interest rates.