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MNI INTERVIEW: Manufacturing Solid But War Sours Sentiment-ISM
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The Federal Reserve will likely raise interest rates twice more in coming months and then keep them there for some time to ensure that inflation resumes its descent toward the central bank’s 2% goal, former Richmond Fed research director John Weinberg told MNI.
"I would say probably a couple more might do it,” he said in an interview. “I think you want rates to be clearly restrictive, and I'm not sure we're there yet.”
Weinberg said it was acceptable for the Fed to hold rates steady last week, particularly given the looming midterm elections, but that it does create some risks given an inflation rate that has been above target for five and a half years.
“If in the past the committee wanted to sit on its hands right before an election, that doesn't matter so much. But that relies on there being pretty solid locked-in public beliefs about what the medium-term path looks like,” he said. “If there's reasons for wondering about that, then that adds a little bit of risk. I think you could say that that's kind of the situation we're in now.” (See MNI INTERVIEW: Lockhart Sees Next Fed Hikes In Dec, Q1)
WOBBLY ANCHOR
He worries inflation expectations are not as firmly anchored as Fed officials claim, given the sheer persistence of lingering price pressures.
“I fear that the prolonged period of elevated inflation could itself be adding some persistence through near-term and medium-term expectation effects. That could be happening even if we don’t see major movements in measures of long-term expectations,” said Weinberg.
“That would be telling us that the market expects the Fed eventually to do enough so that over the long-term inflation is going to come back to 2%, but if you don’t do it then you might lose that confidence.”
He said second-round effects from higher energy costs are possible even if oil prices don’t move higher from current levels around USD100 a barrel. The right level of policy restrictiveness becomes even harder to gauge because the neutral rate of interest could be climbing in real time, said Weinberg.
“It’s made all the trickier by what’s going on with the term structure and term premia. If those are pointing to a general increase in uncertainty all the way across the curve, then certainly that doesn’t make R-star lower, if anything it makes it higher.”
“That’s one of the pitfalls of this language that people slip into sometimes by saying that markets are doing the Fed’s work for it because long rates are going up,” he added. “That’s about long rates and policy is about the short end. If there are things in the environment pushing up rates and you’re seeing that in the long end but the central bank is leaning against that in the short end, that’s working at cross purposes I think.”
HIGHER FOR LONGER
Weinberg said how long rates will need to stay elevated before the Fed can consider a reversal will depend on the path of growth, and on AI investment in particular. But if the current pace of expansion continues, there will be little room for easing on the horizon, he said.
“If the economy sort of continues on the path that it's been on more or less, I don't think you'd want to be in a rush to take away the rate hikes that you put in. If you put it in to bring down inflation, you want to see inflation come down,” he said.
Still, there is a scenario where the Fed might need to come to the rescue of a popping AI bubble.
“Suppose this moderation in tech stock frenzy continues or deepens a little bit, and that feeds through to a slowdown in capital investment, capital expenditures in that sector. Then that could cause the economy to slow, perhaps to the extent of having a mild recession. If that happens, then the Fed is likely to want to respond to that if, if you've got real softening, if you've got real evidence of real softening. But if inflation hasn't really started moving down yet, then you might be you might be stuck with higher inflation."
Nov-02 16:19
The Bank of Canada's rate increase last Wednesday is enough of a signal to affirm its inflation-fighting credentials, and the rate of increases in CPI should subside next year in any case as crude oil prices weaken, former central bank forecaster Pedro Antunes told MNI.
“What we're targeting here is the belief, right? They're trying to make sure that households and businesses believe that the central bank is on it,” said Antunes, now chief economist at Signal49, formerly the Conference Board of Canada.
The memory of the jump in inflation to 8% as the Covid pandemic eased is fresh in officials’ minds, and they are also alert to the potential now for higher prices to feed second-round increases like wage inflation, Antunes said. Taming inflation is more difficult this time because it results from a global increase in oil and gas prices over which monetary policy has no control, he said, but the need to keep price expectations of domestic firms and workers in line remains the same.
"The Bank doesn't want to be behind the eight ball like maybe they were in 2022. They want to send a kind of stronger statement here, especially in light of these higher gasoline and oil price pressures," Antunes said.
NOT DOING VERY WELL
"This is a tough situation for a central bank, right? It's supply. It's not because the economy is hot that they need to raise interest rates. The economy is really not doing very well at all," he said.
Canada's economic growth will slow from 3.3% annualized in the second quarter to 0.8% in the fourth quarter as another round of U.S. tariffs sink in, according to the Bank forecast Wednesday as Governor Tiff Macklem boosted the overnight rate for the first time in three years. The Governor expressed concern that with no end to the Middle East conflict in sight more firms will pass on higher energy costs.
The Bank also boosted its 2027 inflation forecast by a percentage point to 3.1% and said CPI will remain above its 2% target until mid-2028. Macklem said he would be cautious when considering any further hikes, in an economy set to grow at a modest 2% pace over the next two years.
"The Bank wants to kind of talk firmly, talk strongly to say that they will reach target," Antunes said. "Whether we actually need more rate hikes, I don't think we do." (See: MNI INTERVIEW: Macklem-BOC Faces Tough Calls Ahead On Rates) Economists and investors are split over whether the Bank hikes again over its next few meetings.
EXCLUDING CORE INFLATION
Flat job creation this year is another reason to pause, Antunes said, noting that unemployment has been kept from rising partly by a slowing labor supply as the government curbs immigration and Baby Boomers retire.
Crude oil prices should fade next year rather than continue increasing in a way that keeps inflation elevated, Antunes said, though he cautioned that this view, as do views on the outlook for the trade war with the U.S., depend on assumptions about geopolitics.
"It wouldn't necessarily lower prices, but it would at least lower inflation from that 3% range down," Antunes said. The Bank on Wednesday saw inflation above 3%, the top of its 1% to 3% target band, through much of next year.
The Bank also stopped publishing forecasts for two inhouse measures of core inflation, which had stuck near 2% for much of this year. The reason for the change is unclear but Antunes noted an earlier move away from a third core measure that appeared to be giving poor signals.
"Even economists have trouble understanding, because we're not quite sure what is in all of those measures that the Bank targets," he said.
Nov-02 14:47
The Chicago Business Barometer™, produced with MNI, dipped 3.5 points to 55.3 in October. The Barometer remained in expansion, above the neutral 50 mark, for a second month.
The decline was driven by decreases in Supplier Deliveries, Production, Order Backlogs and New Orders, partially offset by an increase in Employment.
SUPPLIER DELIVERIES SHORTEN TO LOWEST SINCE FEBRUARY
Supplier Deliveries fell 10.3 points to their lowest level since February, but remained in expansionary territory for the twenty-first consecutive month. The index mostly reversed the previous month’s increase. Respondents reported mixed conditions: some noted that deliveries remained slow despite the shortening in delivery times, while others cited persistent delays out of Asia.
Production declined 5.2 points, remaining in expansion for a second consecutive month.
Order Backlogs decreased 4.4 points, remaining in contractionary territory for the fourth consecutive month, but still above August’s low.
New Orders edged down 0.6 points, remaining firmly in expansionary territory for a second consecutive month.
EMPLOYMENT AT HIGHEST SINCE APRIL 2021
Employment rose 10.3 points to its highest level since April 2021, returning to expansionary territory after one month in contraction. The increase reflected a higher proportion of respondents reporting increased employment and a lower proportion reporting decreased employment.
PRICES PAID ACCELERATE TO HIGHEST SINCE DEC 2021
Prices Paid accelerated 8.9 points, reaching their highest level since December 2021. Respondents cited cost pressures from chemical- and petroleum-based inputs, as well as fuel surcharges and freight costs. For the eighth consecutive month, no respondents reported lower prices paid than the previous month.
Inventories edged up 4.0 points, but remained in contractionary territory for the third consecutive month.
The survey ran from October 1 to October 13.
Oct-30 13:45
The UK's borrowing skew towards greater short-dated issuance is partly due to a continued shift in investor demand towards the front of the curve, the head of the Debt Management Office told MNI on Thursday.
The demand shift in demand towards the short end has been a clear trend, "not least clearly given the persistent ongoing volatility in the global bond markets, which has been particularly affecting demand for long maturity bonds globally,” Jessica Pulay said in an interview.
But other factors are also at work, including the DMO's assessment "that shorter dated maturities remain relatively more cost effective than longer maturities,” Pulay said.
An additional driver of the increased short-dated issuance has been the DMO's programmatic gilt tenders, which have been more focused on shorter dated issuance.
The strength of the p-tender programme. along with strong market use of the Post-Auction Option Facility and solid demand on syndication deals, has helped the DMO cut the number of scheduled auctions this fiscal year, whilst still meeting its overall remit.
"We have actually been in a position to cancel six auctions since April 2026," Pulay said.
"The final reason why we were able to cancel auctions was because we have skewed to shorter dated supply, our auction sizes are relatively larger at those maturities compared to the longer dated maturities.” (See MNI INTERVIEW: UK Wage Growth To Slow - OBR's Miles)
BILL SALES
Pulay also pointed to the increased T-bill issuance this fiscal year, noting the DMO was on an "evolutionary journey" at the front of the curve.
"T-bills overall are making a contribution of £8 billion to debt financing; this is a GBP3 billion increase to the GBP5 billion that was already announced in April. We issue T-bills also for cash management purposes and our total current T-bill stock is GBP97.1 billion," she said.
The DMO is planning "a significantly greater, on an absolute and proportional basis, increase in short-dated gilt issuance" including T-bill sales, she said, pointed also to the newly-announced maturity point in the T-bill curve.
"We're going to be adding a new maturity point, a 12-month T-bill maturity. We have been issuing one, three and six months so far, so that new maturity is important; we will start issuance in January 2027," she said.
The new one year T-bill, along with the newly-announced standing repo facility -- also to start in January -- and maintained collateral pool would help underpin liquidity at that end of the curve, she said.
Oct-30 11:54
A rollover of NGEU debt in the EU's next long-term budget (2028-34) looks like being the path of least resistance as European leaders struggle to agree on how to fund it amid deteriorating market conditions, EU sources told MNI.
The group of countries backing a rollover now include France, Italy, Poland, Greece and possibly Spain too, one EU source said. Although the frugal group, including Germany and The Netherlands, remain opposed, the source suggested that an NGEU rollover might prove easier to concede than more major concessions on cohesion spending.
A recent EU summit discussion on the budget ended in deadlock as frugal countries continued to clash with Eastern and Southern European states pushing to maintain high levels of cohesion and farm spending.
Under the terms of the NGEU legal framework, repayment of the debt is due to start in 2028 and conclude in 2058. While the repayment schedule is required to maintain a "steady and predictable" pace over that period, strong political pressure from leaders of higher-deficit countries which are wrestling with a surge in financing costs could force an easing in that pace.
ROLLOVER SIZE UNCLEAR
While it is not yet clear how sizeable any rollover of NGEU debt would be, one 'big country' source suggested that leaders would probably be inclined to take "as much as possible" in terms of easier repayment terms.
Bruegel's Zsolt Darvas, a senior fellow at the Brussels-based think tank Bruegel, estimates that a full rollover for the 2028-34 period of the next Multi-Annual Financial Framework (MFF) could save about EUR90bn for that budget period. In a 2024 Bruegel assessment, Darvas estimated that EUR168bn would need to be spent on debt repayments and servicing through 2028-34, EUR97bn on repayments and EUR71bn on interest rates.
"Interest rates have gone up since 2024 and a full rollover would imply a larger debt stock to pay interest on. So, instead of EUR71bn the budget might pay about EUR75bn to 80bn. Still, it means in my assessment that EUR90bn could be saved in that period with a full rollover of EU debt," Darvas told MNI.
European Council President Antonio Costa has called a special EU budget summit on Nov. 26-27 to try and clinch a deal before the end of the year. Before then, Brussels is scheduled to publish its next report on EU contingent liabilities. Following the rise in bond yields across the EU, it is likely that the report will reveal a significant deterioration in the funding outlook for EU bonds.
Oct-30 11:43
Bank of Japan Governor Kazuo Ueda on Friday left the door open to a rate increase as early as December, saying the Bank would assess upside inflation risks and discuss monetary policy at every meeting as it seeks to anchor underlying CPI inflation around its 2% target, following the Board's decision to leave the policy rate at 1.25% on Friday.
Ueda told reporters that the BOJ would not adopt a "wait-and-see approach" to achieving price stability target and it would continue to adjust monetary policy to secure stable inflation. However, he cautioned against anticipating a predetermined pace of tightening. “We cannot say the timing of rate hike and its pace in advance, such as once every several months, as it depends on the upside risk to prices and the degree of accommodative financial conditions,” Ueda said, following the largely expected decision that resulted after an 8-1 vote. (See MNI BOJ WATCH: Board Likely To Hold, Examine Rate Hike Impact)
Although underlying CPI inflation has reached a level broadly consistent with the 2% target, the BOJ cannot declare victory until inflation is sustainably anchored around that level, Ueda said, adding the Bank was assessing whether underlying inflation would remain stable following economic or price shocks. (See MNI POLICY: BOJ Nearing Target To Forgo Victory Declaration)
While upside risks to prices had not strengthened from a month ago, the Bank could not ignore them, Ueda noted. He said the Bank needed to deal with upside price risks "in an appropriate manner as underlying CPI inflation has reached the 2% target,” when pushed on whether the BOJ needed to raise the policy rate towards the neutral level as soon as possible.
“Underlying CPI inflation is at a level that is generally consistent with the price stability target of 2%, and is expected to remain at around that level,” the Bank said in its post-meeting statement. It added that examining the extent to which underlying inflation was anchored around 2% would be important to achieving the target sustainably and stably.
Markets have priced in an 80% of a December hike to 1.5%, with a 1.8% policy rate expected by June.
FINANICAL CONDITIONS
Ueda also acknowledged that the adverse effects of previous rate increases were emerging, particularly in funding conditions for smaller firms. “We need to carefully and strictly examine whether fund-raising problems are expanding through various data including hearings by branches,” Ueda said, warning some accumulated effects of monetary tightening were visible, while others remained difficult to assess.
The BOJ would consider the appropriate conduct of monetary policy in relation to price developments if further adverse effects from previous rate increases emerged, he explained, without elaborating.
OUTLOOK REPORT
The BOJ maintained its median forecast for core CPI inflation in the current fiscal year at 2.5%, but raised its FY2027 projection to 2.6% from 2.5% in July, citing higher crude oil prices. The Bank lowered its FY2027 GDP growth forecast to 0.7% from 0.8%, reflecting the delayed economic effects of higher crude oil prices since August.
However, the Bank maintained its assessment that risks to economic activity were generally balanced, while the CPI outlook remained skewed to the upside.
Oct-30 09:00
The Reserve Bank of Australia is likely to raise its cash rate by a further 25 basis points to 4.85% next week, following elevated underlying inflation in Q3 and a series of hawkish comments from senior officials.
Governor Michele Bullock left the door open to further increases following September's meeting, which delivered the fourth 25bp hike of 2026, saying the Board would do what was necessary to bring inflation back to target. (See MNI RBA WATCH: Bullock Says Will Hike More If Needed)
Since then, inflation has remained stubborn, while Bank officials have signalled that the outlook is set to worsen. The RBA will also update its economic forecasts next week, with senior leadership warning of mounting inflationary pressures that will see the Bank revise its inflation outllook.
Markets price an 80% probability of a hike next week, with the cash rate expected to peak at 4.9% by March.
ECONOMIC DATA
Trimmed mean inflation was 1% q/q in Q3, in line with expectations, while headline CPI was 1.3%, 10bp above forecasts and up from 0.6% in Q2, Australian Bureau of Statistics data showed Wednesday. Trimmed mean inflation was 3.7% y/y in Q3, 10bp above expectations, while monthly trimmed mean printed at 0.3% in September, up 10bp from August. Headline CPI rose 4.3% y/y in September, accelerating from 4.0% in August.
Market services inflaton, which is strongly linked to domestic supply constraints and a key RBA focus, recorded its strongest annual growth since 2024 and was among the largest contributors to Q3 inflation. September's figures also showed automotive fuel prices rose 9.4% m/m following a 14.8% increase in August, reflecting higher oil prices.
While the labour market continued to loosen in September, with unemployment rising to 4.7%, risks of a further rate increase remained skewed to the upside, former bank economists told MNI. (See MNI INTERVIEW: RBA Hike Risk Remains, Despite Jobs Data)
“We always talk about looking through seasonality around the end of the calendar year, and I think this could be a case of looking at the trend numbers now, or even the [non-seasonally-adjusted] numbers,” said Blair Chapman, senior economist at SEEK and a former RBA research economist, noting the ABS's changes to its data collection methodology made its seasonal number less reliable. “When you take a step back and look at it, movements over the last couple of months, it's a bit softer, but it's not as obvious that there's a massive deterioration."
LEADERSHIP SIGNALS
Appearing before the Senate Economics Legislation Committee following the release of Q3 inflation data, Deputy Governor Andrew Hauser said this week inflation remained “too high”. This followed comments last week that the RBA expected quarterly inflation to exceed its August forecasts.
Assistant Governor Sarah Hunter also said on Sunday night's 60 Minutes programme that inflation remained too high. Domestic demand continued to exceed sustainable levels, while inflationary pressures were broadening, she warned.
PAUSE CASE
One former RBA staffer said the Board could nevertheless opt to leave the cash rate unchanged, given Q3 trimmed mean inflation did not exceed 1% q/q.
“If we had a 1.1% [m/m Q3] trimmed mean, that would be above anyone's nowcast that I've seen and it would be above [the RBA]’s statement forecast,” said Justin Fabo, founder of Antipodean Macro and the RBA’s former head of international financial markets. A Q3 trimmed mean result of 1.0% q/q, while still elevated, would give the Board scope to justify a pause by arguing September's 25bp increase to 4.6% had been pre-emptive, he added.
Oct-30 06:47
Persistently weak productivity growth rather than higher energy costs remains the primary source of inflationary pressure in Australia, former Reserve Bank of Australia Board member Ian Harper told MNI, adding that the key question facing the RBA Board was how far rates would need to rise to close the positive output gap.
“We've got growth in aggregate demand that is still ahead of aggregate supply, hence the tightening of policy,” said Harper, professor emeritus at the University of Melbourne and an RBA Board member from 2016 to August 2026. “The reason the Bank had to reverse course earlier this year was exactly that – we underestimated the rate of growth of demand and overestimated the rate of growth of supply.”
The RBA started a hiking cycle in February, increasing its cash rate by 25 basis points then making further moves in March, May and September. With the cash rate now at 4.6%, the Bank still has scope to raise rates further this year, though policy is already restrictive in real terms, Harper noted, with the real rate, calculated by subtracting long-term expected inflation from the nominal rate, remaining at about 2.1%.
“Who wants to say that's not restrictive when the economy is growing at less than that?” he said in an interview.
The RBA assumes productivity growth of 0.7%, which Harper described as already a low estimate, though actual growth has recently been close to zero. Boosting productivity is "out of the Bank's hands," he said.
While any further sharp rise in oil prices would add a further cost-push element to inflation and add to inflation expectations, it would still be a supply-side cost phenomenon, with excess demand and a positive output gap remaining the main force pushing prices higher, he said. Any resulting reduction in real and disposable incomes from dearer fuel could also help moderate demand, potentially allowing central banks to look through the shock.
FORWARD GUIDANCE
Harper backed the RBA's decision to avoid forward guidance tied to a specific time horizon, saying its approach should instead be to explain how policy would respond to changing economic conditions.
Recent speeches by Deputy Governor Andrew Hauser and Chief Economist Sarah Hunter indicated that the Bank was communicating its assessment of the economy and the further policy action which might be needed, without specifying when it would occur, he said.
The approach reflected lessons from the RBA's earlier experience with forward guidance, when statements made with qualifications were interpreted by markets and the public as stronger commitments than intended. “The Bank can give some forward indication of how it's likely to respond as it reads the state of the economy, and that's appropriate,” Harper added.
Understanding the central bank's reaction function could help the public anticipate policy decisions and support the transmission of monetary policy, he continued. But even qualified guidance tied to a particular time horizon risks being interpreted as a commitment. “I don't think it's time to move on from that lesson, because I doubt that people would respond any differently today if you reverted to time-based guidance.”
BOARD VISIBILITY
Harper also questioned expectations that external RBA Board members would frequently make independent public statements on the economic outlook, despite recommendations for improving transparency under the Bank's reforms.
The main purpose of the initiative was to make Board members more publicly visible, rather than encourage them to offer independent assessments of the economy or the likely direction of policy, he said.
The current arrangement was for each Board member to deliver one public presentation a year, he explained, noting the new regime had only recently begun. However, expectations of more detailed public insight into individual members' views or Board dynamics were unrealistic.
Oct-29 22:52
The Federal Reserve looks set to raise rates twice more, probably in December and March, before deciding whether the inflation picture looks sufficiently benign to allow them to hold rates steady there, former New York Fed economist Jan Groen told MNI.
Groen thinks the Fed’s decision to leave rates on hold at 3.75%-4% this week reflects a committee that is deeply divided between officials who feel an immediate need to tighten policy after five and half years of above target inflation and those who believe the central bank can be more gradual.
“The end result is more like a quarterly pace of tightening. They try to take out the the insurance cuts from last year. That's probably the end point. With that dynamic in mind, you're looking at probably a December and March hike, and that's about it.”
Still, uncertainty is high with persistently elevated energy prices and a worrisome broadening out of inflation in the latest readings, he added.
“There’s going to be a slew of inflation data between the December and January meeting. If that data comes in worse than expected, then we might have to start to think about whether three hikes is enough in this cycle," said Groen, now chief U.S. economist at Societe Generale.
Hot inflation figures and strong growth backdrop could have definitely supported an October rate increase, he said. “The inflation data is pretty abysmal, especially if you look under the hood, things like super core and all these kinds of trimmed measures.”
MORE HIKES COMING
Warsh’s recognition that financial conditions can still not be described as tight indicates that he sees the need for additional hikes, said Groen. He suspects Warsh might have preferred to hike rates at the October meeting but lacked support from enough FOMC members.
“I think if it would have been up to him, he would have probably voted for a hike. But I think the likes of (New York Fed President John) Williams and others, they don't want to move at a very fast pace in terms of tightening policy. The data really needs to drag them to the next hike,” he said. (See MNI INTERVIEW: Lockhart Sees Next Fed Hikes In Dec, Q1)
“It’s pretty clear he knows that they're kind of behind the curve. But there's a committee, and there's just a big chunk of the committee that just doesn't want to move quickly.”
PRODUCTIVITY MIRAGE
Warsh’s optimism that robust economic activity can co-exist with low inflation is based on hopes for rapid productivity growth that Groen fears might not materialize.
“The data is not that convincing, to be honest. He is talking a lot about productivity over the last couple of years having moved up. I'm not so sure about that. It's been very volatile, but if you kind of dig underneath the data and kind of smooth things out, I think trend productivity recovered from the trough from COVID, but it's more or less the same as it was around 2019 or something like that,” he said.
“So I don't see evidence yet of structurally higher productivity growth going forward. I'm sure it's going to happen a few years down the line, but I think implementing the advantages of AI into how companies operate takes quite a long time.”
In the meantime, AI has become an inflationary force for now. “Demand for AI-related things is a lot of faster than the supply. That’s something to keep an eye on because it has a bit of a bubble flavor to it.” (See: MNI INTERVIEW: Fed Will Hike Later To Keep Up With AI- English)
Oct-29 17:46
The Federal Reserve should raise interest rates steadily until it decides policy is restrictive enough to start reining in an inflation rate that has been moving in the wrong direction, former Cleveland Fed President Loretta Mester told MNI.
“I would have preferred that they go ahead and move the rate up,” she said in an interview regarding this week’s FOMC decision to hold rates steady.
“There were certainly enough people in their SEP from September who don't feel that they're finished raising rates in the cycle, and the data and the economic arguments seem to be pretty strong that they're going to need to bring rates up from the current level.” (See MNI INTERVIEW: Lockhart Sees Next Fed Hikes In Dec, Q1)
Mester was disappointed by what she viewed as an insufficient explanation during Chairman Kevin Warsh’s press conference for the absence of a tightening move in the face of data that appeared to call for one.
“I would have hoped, given how the data played out in the intermeeting period really supporting further rate increases I believe, and the fact that they decided not to do it, I would have liked him to put out – here’s what we talked about as the factors that influenced that decision. And we got none of that really,” Mester said.
“I thought Jackson Hole was the start of him explaining more about the economy and sort of their reaction function. He might not call it a reaction function, but that was kind of where he was going, and I didn't feel we got a lot of that, if any of that really, in the October press conference.”
SLOWER IS BETTER
Mester worries that if the Fed moves too slowly to contain the recent bout of inflation, it might need to act more aggressively later, seeing echoes of the complacency she experienced as an FOMC member around 2021.
“If you remember during the 2021 run up in inflation, it was always like, well, we need more information,” said Mester. “When you delay, and if the risks are tilted to the upside on the inflation data, then I think there is a higher chance that you could have to go faster, and it's probably better to go slower.”
She also believes the central bank should seize the moment – against a backdrop of robust economic activity and stable employment – to move rates higher in order to battle a persistently high inflation rate that’s still hovering near 3%, well above the 2% goal.
“There is an opportunity here, because the labor market has been very stable and steady, and the inflation data had been moving up, not down. So it seemed to me the combination of looking at the dual mandate goals would say take advantage of this time, where basically everything was moving in the in the direction that suggests you need to raise rates, to go ahead and take advantage of that,” said Mester.
AI INFLATION
Mester said Warsh is right to point out that not all growth is inflationary, and that productivity gains should help relieve price pressures over the long run. But, in the near-term, AI and the demand boom that comes with it is actually proving an inflationary force, said Mester.
“In the near term in my view it is inflationary. What we’re seeing in the AI buildout is creating more imbalance between supply and demand because a lot of those components are in short supply." (See MNI POLICY: AI Buildout Emerges As Top Inflation Risk For Fed)
Mester pointed to a dissonance within a committee in which the chair is no longer offering forward guidance but many of colleagues continue to very much do so.
“It's hard to argue the Fed’s not doing forward guidance. Yes, it is true, the chair isn't doing forward guidance, but I mean, there's still forward guidance being given by members of the committee. I think that they're going to have to resolve something there,” she said.
Oct-29 16:20About
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