Chair Wash Positive on Economic Growth but Exceeds Inflation Target

Kevin Wash, the Chair of the U.S. Federal Reserve, diagnosed that while economic growth, consumption, and employment are robust, inflation still exceeds the target. Adam Posen, President of the Peterson Institute for International Economics, assessed that it is appropriate for Chair Wash to reduce forward guidance on interest rate paths, but not providing an economic outlook is undesirable. He argued that current interest rates are not high enough to sufficiently lower inflation and that two rate hikes are necessary before the end of the year. Chair Wash mentioned that economic growth is strengthening and capital expenditures are increasing rapidly. He explained that despite the surge in oil prices and tariffs, consumer spending has increased by over 2% in the past four quarters. Posen emphasized that this economic assessment provides a benchmark for internal discussions within the Federal Open Market Committee, pointing out that without a forecast, members would only be talking past each other. He stated that forward guidance, which promises a future path for interest rates, should be distinguished from economic forecasts. Posen assessed that the likelihood of continued inflation is high and that the current level of interest rates is too low to sufficiently reduce inflation. He disagreed with the Fed's decision to lower the benchmark interest rate by 75 basis points last fall, stating that the Fed's credibility has diminished. Posen argued that the Fed should raise the benchmark interest rate twice by the end of this year, but actual increases may be postponed to December and January due to the midterm elections.