WASHINGTON: The Federal Reserve (Fed) is “a long way from raising interest rates at this point,” Fed governor Christopher Waller said on Monday, in remarks that put him among the core of US central bank officials ready to leave support for the economy in place until the recovery from the coronavirus pandemic is complete.
Waller said he saw no evidence at this point that US inflation expectations were rising in a worrisome way, or that bond yields or asset prices were prompting concerns about financial instability.
“I would be concerned if inflation expectations were to suddenly become unanchored to the upside. That would signal something about overheating,” Waller said during an online event organised by the Peterson Institute for International Economics. But so far, “the markets expect us to allow some inflation overshooting, but they don’t expect it out into the future.”
Waller’s comments were his first since he joined the Fed’s board of governors in December,
He used most of his remarks on Monday to rebut the idea that the central bank would keep interest rates low or add to its bond purchases in order to help the federal government finance the debts it is accumulating as part of its coronavirus response.
Waller said he wanted to “put that narrative to rest. It is simply wrong. Monetary policy has not and will not be conducted for these purposes.”
Policy, he said, will be set “solely to fulfil” the Fed’s mandated goals of achieving maximum employment and stable inflation.
Waller, previously the executive vice president and research director at the St Louis Fed, was nominated to the Fed board along with Judy Shelton by former president Donald Trump. Last month, President Joe Biden withdrew Shelton’s nomination for consideration amid concerns she was too partisan and would not be protective of the Fed’s independence.
The members of the Fed’s board and the powerful chair of the central bank are appointed by the president with approval of the US Senate, but the governors’ long terms and protection from being fired over policy disputes are meant to insulate the central bank from political pressure.
The federal government has piled up record debt financing the response to the pandemic, something policymakers have been comfortable doing because the US government can borrow money so cheaply on international markets.
Once the Fed’s goals for the economy are met, that means interest rates might start to rise, making US debt service more expensive – and possibly leading to pressure on the Fed to expand its own holdings of government debt to hold rates down.
While the Fed and the US Treasury have worked closely together on many issues – and jointly set up and managed several programmes during the recent crisis – that cooperation must have limits, Waller said.
If a central bank determines, for example, that rates need to rise to control potential inflation, policymakers need the independence to do that even if elected officials oppose the idea.
“There are sizeable costs if cooperation turns into fiscal control,” Waller said. – Reuters
