(Bloomberg) – Federal Reserve Governor Lisa Cook pointed to several signs of easing inflationary pressures, including declining wage increases.
“Recent data suggests that labor compensation growth has indeed slowed somewhat over the past year,” she said in a speech prepared for the annual meeting of the American Economic Association in New Orleans on Friday.
While he stressed that inflation remained far too high for the Fed’s liking, Cook also saw signs of easing inflationary pressures elsewhere, including a spike in new lease increases and a diminishing supply shortfall of key materials.
Policymakers have focused on what they see as an unbalanced job market, where demand for workers far exceeds supply, leading to wage increases that Fed officials say are incompatible with meeting their 2% inflation target.
Median hourly wages rose 4.6% in December from a year earlier, down from a rate of 4.8% in November, according to data from the employment agency released Friday. But payroll growth remained strong over the month and the unemployment rate fell to 3.5%.
Fed officials raised rates by half a percentage point last month, slowing after four consecutive 75 basis point hikes as they continue the most aggressive tightening campaign since the 1980s. That brought the target on its reference rate to a range of 4.25% to 4.5%.
Officials also issued new forecasts showing they expect policy to remain tight this year, with 17 out of 19 officials expecting rates above 5% by the end of 2023. No official forecasts from the Fed this year.
The Fed aims to reduce inflation, which is well above the 2% target but has recently shown signs of easing. The personal consumer spending index, the Federal Reserve’s preferred measure of inflation, posted a year-over-year rate of 5.5% in November, down from a multi-year high of 7% in June.
While housing costs, as measured by the PCE price index, are likely to continue to rise in the coming months, that “process should slow significantly over the course of the year,” due to the trend in new rental properties, Cook said.
While Fed officials welcomed the recent easing of price pressures, they stressed that they need “significantly more evidence of progress to be sure that inflation was on a sustained downward path,” according to the minutes of last month’s meeting.
“Critically, we need to be vigilant to ensure that cost pressures and disruptions in the pandemic era do not have a lasting impact on inflation,” said Cook. “If cost shocks and supply disruptions keep inflation high for long enough, household and corporate inflation expectations could rise – 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” as it could make the high inflation the US is facing more stubborn.
“I am committed to bringing inflation back to our target of 2%,” she said, adding that the Fed must continue to improve its understanding of price growth and the underlying structural causalities, as well as the bank’s ability to predict risk .
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