Interest rates need to stay high to mitigate inflation: NY Fed Chief

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Federal Reserve Bank for New York President John Williams, expressed interest in a high-interest rate policy in an effort to contain inflation. 

"To me, the important thing is we need a sufficiently restrictive stance, we need to retain a sufficiently restrictive stance of policy, we’re going to need to maintain that for a few years to make sure we get inflation to 2%, then eventually we’ll get interest rates presumably back to more normal levels," Williams said.

After the COVID-19 outbreak in March 2020, the Fed raised interest rates by 450 basis points, reaching a high of 4.75% from 0.25%.

The US labor market is the focal point of this policy. The fed identified the corrective inclinations of the market to counteract the covid recession as the primary drive for inflation. After the break out of the pandemic and the consequent precautionary measures taken by the state to mitigate the contagion, approximately 20 million workers were rendered unemployed. Starting in June 2020, hundreds of thousands of jobs were being steadily added without fail to accommodate for the covid-triggered unemployment. 

Read more: US Federal Reserve to raise interest rates, recession fears heighten

The Fed has established the growing number of jobs and the heftiness of wages as the primary drive for inflation. Subsequently, interest rates were being set in accordance with the job data of the NFP (non-farm payrolls) reports issued by the US Labor Department. 

The market's inclinations at calibrating supply and demand proved to have detrimental effects on the US economy. The Fed aims to employ high-interest rates to stifle investments and contain the increasing surge in job opportunities. 

Chairman Jerome Powell said that the Fed wanted to give disinflation, which has just begun, a chance to work, instead of just resorting to higher interest rates. "If strong labor market reports or higher inflation reports continue, the Fed may need to raise rates more than is currently priced in," Powell said on Tuesday. "Disinflation has begun but it has a long way to go. This process is likely to take quite a bit of time, it's likely to be bumpy, not smooth."

The Consumer Price Index (inflation gauge) increased at a pace of 6.5% annually, this was three times more than the Fed's target (2% per year). Powell even predicted that the Fed might not achieve its long-held goal of 2% inflation until late 2024.