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Discussing the two-sided risk that the U.S. central bank faces in setting monetary policy, Federal Reserve Board Governor Lisa D. Cook said she’s aware that continued momentum in demand “could keep the economy and labor market tight and slow the pace of disinflation.”
But she’s also “attuned to the risk of an unnecessarily sharp decline in economic activity and employment” from overtightening. Some parts of the economy are showing the strain of tighter financial conditions, she said in a speech on Thursday.
Cook believes that a soft landing is possible, but it isn’t assured.
“As we try to identify the full, lagged effects of monetary policy tightening, I am considering whether small businesses, the housing sector, and low- and moderate-income households could be warning of broader stress ahead,” she said.
Cook also said she’s attentive to the risk of renewed global economic shocks. “Amid highly elevated geopolitical tensions, however, the risk of a sharp rise in global energy prices remains salient.”
She also noted that when many economies tighten policy simultaneously, “cross-border financial spillovers could amplify the effects of respective tightening.” The concurrent tightening could mean that individual central banks may not have to tighten quite as much.
“In sum, U.S. monetary policy actions can produce spillovers abroad and create tradeoffs for foreign monetary policy,” Cook said. “Spillovers from foreign economies can be sizable for the U.S. as well, especially in the current environment, in which many central banks have tightened policy rapidly to fight inflation.”
In the Federal Reserve’s responsibility to get inflation down to its 2% target, the central bank is “aware that we are affected by and have effects on the world around us.”