Last week, Fed policymakers announced that they would take action to hike interest rates by 0.75% — the boldest move to combat inflation since 1994. The central bank already increased rates by 0.5% in May, the largest such increase since 2000, following a 0.25% rate hike from near-zero levels in March.
Waller, one of the seven policymakers charged with determining the Fed’s monetary policy, said at a conference in Dallas that monetary tightening could drive unemployment to 4% or 4.25%, per Reuters. According to the U.S. Bureau of Labor Statistics, the unemployment rate is presently 3.6% — almost as low as the level that prevailed before COVID-19 and the lockdown-induced recession.
Meanwhile, the Consumer Price Index (CPI) increased 8.6% year-over-year as of May, while the Producer Price Index (PPI) — which tracks inflation for wholesalers — increased 10.8% over the same period, according to two recent reports from the Bureau of Labor Statistics.
The Federal Open Market Committee, which handles the central bank’s monetary policy interventions, has a dual mandate to maximize employment while keeping inflation low. Historically, there is a tradeoff between the two goals, with low unemployment associated with higher inflation and high inflation associated with lower unemployment.
“A falling unemployment rate signals an increase in the demand for labor, which puts upward pressure on wages,” Federal Reserve Bank of St. Louis economist and researcher Kevin Kliesen explained in January 2020. “Profit-maximizing firms then raise the prices of their products in response to rising labor costs.”
At the conference, Waller indicated that he would be open to additional bold actions meant to combat inflation. “If the data comes in as I expect, I will support a similar-sized move at our July meeting,” Waller said of another 0.75% rate hike. “The Fed is ‘all in’ on reestablishing price stability.”
The Fed’s benchmark interest rate is now between 1.5% and 1.75%. Rate hikes increase the cost of borrowing money for businesses and consumers — a move that tends to cut inflation at the expense of economic activity.
“Job gains have been robust in recent months, and the unemployment rate has remained low,” the Federal Open Market Committee diagnosed in a statement last week. “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
While monetary policymakers have taken action against inflation following calls from Wall Street, President Joe Biden continues to point toward the Russian invasion of Ukraine as the driver of soaring prices.
“Putin’s Price Hike hit hard in May here and around the world: high gas prices at the pump, energy, and food prices accounted for around half of the monthly price increases, and gas pump prices are up by $2 a gallon in many places since Russian troops began to threaten Ukraine,” Biden argued two weeks ago in a statement. “Even as we continue our work to defend freedom in Ukraine, we must do more — and quickly — to get prices down here in the United States.”
The month of June has been marked by multiple stock market selloffs amid the poor inflationary news and the Fed’s subsequent action.