Fed’s Cook Sees Signs Inflation Is Easing but Says It’s Still Too High

(Bloomberg) -- Federal Reserve Governor Lisa Cook highlighted a variety signs of easing inflationary pressuring, including decelerating wage gains.

“Recent data suggest that labor-compensation growth has indeed started to decelerate somewhat over the past year,” she said in a speech prepared for delivery to the American Economic Association’s annual meeting in New Orleans on Friday.

While stressing that inflation remained far too high for the Fed’s liking, Cook also saw signs of ebbing inflationary pressures elsewhere, including a topping out of increases for new rentals and ebbing supply shortage of key materials.

Policy makers have zeroed in on what they see as an unbalanced jobs market, with demand for workers far outstripping supply, leading to wage increases that Fed officials reckon are not compatible with the achievement of their 2% inflation goal.

Average hourly earnings rose 4.6% in December from a year earlier, down from a 4.8% pace in November, according to Labor Department data released on Friday. But payrolls growth remained strong last month, and the unemployment rate fell to 3.5%.

Fed officials raised rates by a half percentage point last month, slowing down after four straight 75 basis-point hikes while extending the most aggressive tightening campaign since the 1980s. That brought the target on its benchmark rate to a range of 4.25% to 4.5%.

Officials also issued fresh forecasts that showed they expect policy to remain tight this year, with 17 out of 19 officials projecting rates above 5% by the end of 2023. No Fed official forecast rate cuts this year.

The Fed is aiming to bring down inflation, which is running well above its 2% target but which has recently shown signs of easing. The personal consumption expenditures price index, the US central bank’s preferred inflation gauge, clocked in at a year-on-year rate of 5.5% in November, down from a multi-decade high of 7% in June.

While housing costs as measured in the PCE price index will likely increase further in the coming months, that “process should slow appreciably over the course of the year,” reflecting the trend in new rentals, Cook said.

While Fed officials have welcomed the recent ebbing in price pressures, they’ve stressed that they’ll need “substantially more evidence of progress to be confident that inflation was on a sustained downward path,” according to the minutes of last month’s meeting.

“Crucially, we must be vigilant to ensure that pandemic-era cost pressures and disruptions do not have lasting effects on inflation,” Cook said. “If cost shocks and supply disruptions keep inflation elevated for a long enough period, households’ and firms’ inflation expectations could move higher—a development that could put additional upward pressure on inflation,” she said.

Cook added that any de-anchoring of expectations “would be a major concern,” because it could make the high inflation that the US has been dealing with more persistent.

“I am committed to bringing inflation back to our 2% goal,” she said, adding that the Fed must continue to advance its understanding of price growth and its underlying structural causal relationships, as well as the bank’s ability to forecast risks.

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