Inflation 'unacceptably high,' must be Fed's primary focus, says Federal Reserve governor

No one has to tell anyone who shops for groceries or pays the rent that inflation is out of whack. But everyone is listening these days to how officials at the Federal Reserve describe inflation, searching for clues for just how much higher the Fed could drive interest rates.

Federal Reserve Governor Lisa D. Cook, who previously taught economics and international relations at Michigan State University, visited Detroit Wednesday and acknowledged that "inflation remains much too high." But she stopped short of saying how far the Fed will have to go after the six rate hikes consumers and businesses saw so far in 2022. And she did not say how long the Fed would keep interest rates high and restrictive. Much, she said, will depend on the progress that's made to bring inflation down.

"But rest assured, we will keep at it until the job is done," Cook said, speaking at a Detroit Economic Club meeting held at the Masonic Temple.

This week, Fed officials appeared to be reading off one script.

Inflation remains top of mind for most consumers — and the Federal Reserve. On Monday, New York Fed President John Williams called inflation the No. 1 economic concern across the globe and noted that "those who can least afford the rise in costs for food, housing and transportation suffer the most."

On Wednesday, Fed Chair Jerome Powell said the Federal Reserve will push rates higher than previously expected and keep them there for an extended period. But he also indicated that the Fed won't try to trigger a recession with sharp rate hikes in the months ahead just to get inflation under control faster.

"Without price stability, the economy does not work for anyone," Powell said.

"We will stay the course until the job is done," Powell concluded his speech at the Brookings Institution in Washington, D.C.

The Fed next meets Dec. 13 and Dec. 14 -- and we're likely looking at the seventh rate hike for 2022.

Inflation isn't going away soon, but the Fed is also maintaining that some progress in the fight is being made and analysts say it's possible that rate hikes could slow down in the months ahead.

Cook said Wednesday that we've started to see some signs of improvement in the inflation data.

Some prices are falling, she said, including wholesale prices for used cars and prices for key manufacturing components, like plastic resin and steel. The October report on consumer prices was encouraging, she said, and indicates that "inflation pressures on businesses may be easing."

"Services, however, make up about two-thirds of consumer spending, and inflation in that sector has not yet slowed," Cook said.

"Notably, inflation in housing costs shot up this year and will likely contribute substantially to overall inflation for some time."

Lisa D. Cook, a member of the Board of Governors of the Federal Reserve System, talks to the Detroit Economic Club during a luncheon at the Masonic Temple in Detroit on Wednesday, Nov 30, 2022.
Lisa D. Cook, a member of the Board of Governors of the Federal Reserve System, talks to the Detroit Economic Club during a luncheon at the Masonic Temple in Detroit on Wednesday, Nov 30, 2022.

Cook's remarks in Detroit gave a clear clue that higher interest rates and the fight against inflation aren't over yet. She referred to inflation as being "unacceptably high."

And she said inflation must be the Fed's "primary focus."

And she expressed some concerns that "growth in labor costs remains well above pre-pandemic rates."

Referring to remarks made by the Fed's policy committee in November, she said the Fed anticipates "ongoing increases."

In her remarks, Cook noted that prices for services overall have accelerated sharply this year and may prove to be a persistent factor keeping inflation elevated.

"Demand for services continues to recover from its pandemic lows, with the release of pent-up demand for travel evident to anyone who has spent much time in DTW and other airports recently," she told the audience.

Recession worries build for many

The big question from the audience Wednesday appeared to be about the likelihood of a recession. Answering several recession-related questions, she urged "caution and humility" about signals of a recession ahead.

"Luckily, we don't have one" right now, she said of economic conditions in late November.

She acknowledged that the economy faces a highly uncertain time in the post-pandemic economy. "I am used to working in highly uncertain environments," she said, indicating that she wrote her dissertation on the Russian banking environment in the 1990s.

As for the slowdown in the housing market, which some worry could fuel a recession, she said the falloff in housing is not like what the economy saw in the financial meltdown of 2008 because credit quality has been stronger.

Fed governor gives nod to Michigan background

Cook remains part of the MSU faculty but is on leave during her federal appointment. She now lives out of state in her role as a Fed governor. But she made made several references to her Michigan connection. She said she has toured an auto plant and visited businesses in the state as part of economic research at the Fed.

She referred to the "impressive innovation happening in the auto industry and what it tells us about future prospects for productivity in the U.S. manufacturing sector and in the economy more generally. I can think of no better place to do that than in the Motor City."

As part of her opening remarks, she warmly said she wished she had been in Detroit last week when she could have participated in the Turkey Trot run, an annual tradition for her family.

She was asked to describe Detroit in one word, and she answered, "Resilient."

Cook made history this year when she became the first Black woman in the central bank's 108-year history to serve on the Federal Reserve's Board of Governors. Cook took office on May 23 to fill an unexpired term ending Jan. 31, 2024.

Cook's experience includes serving as a research associate at the National Bureau of Economic Research, as well as a senior economist on the Council of Economic Advisers under President Barack Obama from 2011 to 2012.

She faced intense criticism from Senate Republicans before ultimately being confirmed by the Senate on a party-line vote of 51-50, with Vice President Kamala Harris casting the decisive vote. GOP opponents said she was unqualified and charged that Cook — who earned a  doctorate in economics from the University of California, Berkeley — would serve as an "inflation dove" who wouldn't take rapidly rising prices seriously.

Lisa D. Cook, a member of the Board of Governors of the Federal Reserve System, talks to the Detroit Economic Club during a luncheon at the Masonic Temple in Detroit on Wednesday, Nov 30, 2022.
Lisa D. Cook, a member of the Board of Governors of the Federal Reserve System, talks to the Detroit Economic Club during a luncheon at the Masonic Temple in Detroit on Wednesday, Nov 30, 2022.

And Cook has been hitting the inflation message hard in her public speeches.

Cook expressed concerns in her first speech as a Fed governor at the Peterson Institute for International Economics in early October that inflation has remained "stubbornly and unacceptably high."

She noted then that a "Fed Listens" event in September heard how businesses, families and communities are adapting to changes in the post-pandemic economy. "Notably, we heard about the burden that lower- and middle-income families are feeling from high inflation," she said then.

More:Mild recession ahead in 2023, U-M economists say

A key takeaway, she said then, is the important role that the Fed has in achieving two mandates — promoting a strong labor market and low inflation, often referred to as price-stability.

Cook noted in her talk in Detroit that she was appointed to the financial stability committee on the Fed.

"The labor market is strong," she said.

Why the Fed wants to control inflation

"One thing we know is that inflation erodes standards of living, especially for those at the bottom," she said. But she indicated that inflation must get under control to promote a strong environment for jobs and the economy.

For many consumers, inflation is a day-to-day battle when they're buying groceries for the week, filling up the car at the gas station and paying their utility bills each month.

But Cook noted that the longer inflation persists, the more of a serious threat it becomes for the overall economy if an "inflationary psychology" takes hold and people fall into a mindset where they spend quickly to avoid higher prices down the line and start hoarding goods. Such activity leaves little opportunity for economic growth.

"My time doing dissertation research in Russia in the mid-1990s taught me just how disruptive and painful an extremely high-inflation environment can be," Cook said in her speech in October.

More:Fight against Federal Reserve nominee Lisa Cook includes email blasts to MSU professors

The Federal Reserve has been trying to cool down inflation by raising interest rates throughout most of 2022, ever since it kicked off a series of rate hikes with a small increase of 0.25 percentage points in March.

At subsequent meetings, the Fed moved more aggressively, including raising rates four times by 0.75 percentage points at Fed policy meetings in June, July, September and November.

Many economists anticipate that the Fed might slow down a tad and raise rates by half of a percentage point at its two-day meeting Dec. 13 and Dec. 14.

A rate hike in December would mark the seventh time the Fed has raised rates in 2022. After the last rate hike in November, the short-term federal funds rate now runs in the range of 3.75% to 4%. It had been close to zero before the rate hikes began in March — and the short-term rate sits at the highest level in 15 years.

Moody's Analytics chief economist Mark Zandi said he'd expect a half-percentage-point hike in December.

In 2023, Zandi expects a 0.25 percentage point hike in January and then another 0.25 percentage point hike in March, putting the funds rate then between 4.75% to 5%.

After that, he said, the Fed is likely to pause with its rate hikes to see the "full impact of their aggressive rate increases on inflation and economic growth."

"My sense is they will have enough evidence that wage and price pressures are headed in the right direction."

Zandi expects that inflation will be close to the Fed’s target by the spring and summer of 2024.

More:Fed hikes interest rate again by 75 basis points as inflation refuses to cool

For consumers, interest rates have steadily moved higher on car loans, credit cards and mortgages in 2022.

The average new five-year car loan is 6.05% now, compared with 3.92% a year ago, according to data through Nov. 30. But consumers with weaker credit pay far more than that average rate.

The average rate on a credit card now is 19.2%, up from 16.32% a year ago, according to

Rates on a home equity line of credit have climbed to 7.93% now, compared with 4.05% a year ago.

Mortgage rates shot up in the past year, and in late October soared above 7% for the first time in 20 years.

The average 30-year fixed-rate mortgage declined some in recent weeks and the weekly average hit 6.58%, according to the Nov. 23 report from Freddie Mac, which noted that home sales have been slowing across all price points.

The average rate in late November is about double the 3.22% average at the start of 2022.

Inflation isn't as hot as it was back in June but it still is far above what any consumer would consider to be reasonable. The annual inflation rate climbed to a peak of 9.1% in June — the largest increase in 40 years — but was down to 7.7% in October. October's data represented the smallest 12-month increase since the period ending in January.

The most updated inflation data for November will be released Dec. 13 by the U.S. Bureau of Labor Statistics.

The inflation fight is extremely challenging, as the Fed risks raising rates so dramatically that it drives the U.S. economy into a recession in 2023. The University of Michigan forecasting team has said a mild recession is likely in the cards for next year, noting that the Fed is "prepared to tolerate a mild recession" to combat high prices.

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This article originally appeared on Detroit Free Press: Fed governor Lisa Cook says 'inflation remains much too high'