The full impact of the Fed’s rate hikes on the real economy remains to be seen, says former Vice Chairman Blinder

By Lisa Pauline Mattackal

1 September (Reuters) – The full impact of the Federal Reserve’s rate hikes that began in March 2022 have still not fully spilled over into the real economy, a former central bank vice chairman said on Friday.

The Fed has raised interest rates by a total of 525 basis points to between 5.25% and 5.50% over the past 17 months.

“I think there’s a lot more to see,” Alan Blinder, vice chairman of the Fed between 1994 and 1996, told the Reuters Global Markets Forum (GMF).

“We are talking about historical average lags of two to three years between monetary policy and inflation. On the other hand, if it’s three or four months quicker, that’s no big deal and suggests there’s still a long way to go,” added Blinder.

Blinder also said that core inflation tends to respond more slowly to monetary policy than headline inflation and that coupled with the transmission delays, the Fed should consider pausing rates for some time from here.

Inflation, as measured by the Personal Consumption Expenditures (PCE) Price Index, remains well above the Fed’s 2% target at 3.3%, while the “core rate,” which excludes volatile food and energy prices, comes in at 4.2%, like the show latest data .

The “last mile” of cutting inflation could prove difficult for the Fed, Blinder said, adding that the central bank will not be “persistent” if inflation settles slightly above its stated 2% target.

“Once the first digit of core PCE is 2% while the second digit is maybe 2.8%, I think the Fed will start easing inflation,” he said.

“They might conclude that the production and employment costs for going from 2.8% to 2% are just very high,” Blinder said, adding that they are “nowhere near” a public announcement of a postponement would pursue inflation targets . (Join GMF, a chat room hosted on Refinitiv Messenger, for live interviews: https://tinyurl.com/yyr3x6pu)

(Reporting by Lisa Mattackal in Bangalore, Divya Chowdhury and Savio Shetty in Mumbai; Editing by Divya Chowdhury and Andrea Ricci)