This is not the inflation outcome I am looking for to support a slower pace of rate hikes or a lower terminal policy rate than projected in the September 2022 SEP. And, though there are additional data to come, in my view, we haven't yet made meaningful progress on inflation and until that progress is both meaningful and persistent, I support continued rate increases, along with ongoing reductions in the Fed's balance sheet, to help restrain aggregate demand. As far as achieving our dual mandate, this is a one-sided battle. We currently do not face a tradeoff between our employment objective and our inflation objective, so monetary policy can and must be used aggressively to bring down inflation.
As I mentioned earlier, rent growth has been very high recently. The housing services component of the PCE price index rose a bit above 0.7 percent in August, which was slightly above the previous three-month average. And I expect a similar pace to continue for a while, well into next year. Why? Shelter inflation measures the rents actually paid by households. Only a fraction of households sign a new lease in a given month or renew their lease each month. So, when monthly shelter inflation is calculated, it includes a large share of homes under lease where rents did not change. As a result, changes in market conditions show up in the inflation statistics only over a period of several months. In addition, the inflation statistics use a six-month average when calculating rent growth. Asking rents and rents on new lease contracts—which do reflect contemporaneous rental market conditions—have been rising at a fast pace for more than a year. These increases have fueled shelter inflation so far this year, and they should continue to do so for at least the next six months. That said, there is a glimmer of hope in the most recent readings of asking rents, where the rate of increase has stepped down a bit. This slower pace should eventually contribute to a slowdown in shelter inflation, although that might not be seen until later next year.
I don't think that this extent of data is likely to be sufficient to significantly alter my view of the economy, and I expect most policymakers will feel the same way. I imagine we will have a very thoughtful discussion about the pace of tightening at our next meeting.
In considering what might happen to alter my expectations about the path of policy, I've read some speculation recently that financial stability concerns could possibly lead the FOMC to slow rate increases or halt them earlier than expected. Let me be clear that this is not something I'm considering or believe to be a very likely development.
In the current situation, with risks to inflation forecasts skewed to the upside, I believe policy judgments must be based on whether and when we see inflation actually falling in the data, rather than just in forecasts. Although most forecasts see considerable progress on inflation in coming years, it is important to consider whether inflation dynamics may have changed in a persistent way, making our forecasts even more uncertain.
In our current economy, with a very strong labor market and inflation far above our goal, I believe a risk-management approach requires a strong focus on taming inflation. Inflation poses both a near- and long-term threat. Aside from the immediate effect of higher prices on households and businesses, the longer it persists and the more people come to expect it, the greater the risks of elevated inflation becoming entrenched. I think it is critical that we prevent an inflationary psychology from taking hold. This is not simply an abstract concept, but a risk I take seriously based on personal experience. 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.