Rate hikes needed to tame ‘stubbornly’ high inflation, Fed official Lisa Cook says

The Federal Reserve needs to impose additional interest rate hikes to tame inflation that “remains stubbornly and unacceptably high,” Fed Governor Lisa Cook said in public remarks on Thursday.

Cook advocated maintaining a hawkish policy as inflation has showed “a slower decline than I had anticipated” over the last several months. Conditions will “likely will require ongoing rate hikes and then keeping policy restrictive for some time” until inflation returns to acceptable levels, she added.

“The widespread nature of the inflation pressures suggests that the overall economy is very tight, with constrained supply continuing to fall short of demand,” Cook said during an appearance at the Peterson Institute for International Economics in Washington DC. “The Fed cannot act directly on supply, but it can moderate demand by tightening monetary policy.”

“In sum, inflation is too high, it must come down, and we will keep at it until the job is done,” Cook said.

President Biden appointed Cook to serve on the Fed’s seven-member board earlier this year. The Fed has hiked its benchmark rate by three-quarters of a percentage point in each of the three meetings she has attended.

Cook said she “fully supported” the larger-than-normal three-quarter point hikes.

The Fed’s current projections call for rate hikes at each of its two remaining meeting this year. The hikes are expected to amount to 125 basis points, or another 1.25% by the end of the year.

Cook noted the Fed’s hikes to date have “led to a sharp tightening of US financial conditions.” She pointed to slowness in the US housing market and private business investment as a sign of the central bank’s impact.

Cook’s remarks echoed those of Fed Chair Jerome Powell and other policymakers who have indicated rate hikes will continue until inflation meaningfully recedes. That’s despite mounting fears among investors that the Fed will go too far with its policy tightening efforts and steer the US economy into a deep recession.

“Although lowering inflation will bring some pain, a failure to restore price stability would make it much harder and much more painful to restore it in the future,” Cook said.

She added that it would be “appropriate” for the Fed to slow the pace of its policy tightening “at some point” in the future.

Former Treasury Secretary Larry Summers, a frequent critic of the Fed, argued the Fed is still underestimating the side effects of its policy actions. During an interview with the Financial Times, he predicted US unemployment will need to hit 6% in order to properly tame inflation – well above the Fed’s current projection of unemployment no higher than 4.4% by 2025.

“The question is not some trade-off of inflation against unemployment,” Summers said. “The question is what policy path would minimize the total amount of unemployment distress over time,” Summers told the outlet.