Fed policymakers call for further rate hikes to beat inflation

Fed policymakers call for further rate hikes to beat inflation

Federal Reserve policymakers signaled on Wednesday that they will push ahead with more interest rate hikes, with many supporting a top policy rate of at least 5% even as inflation shows signs of peak and economic activity slows down.

“I think we need to continue, and we will discuss at the meeting how much to do,” Cleveland Fed President Loretta Mester said in an interview with the Associated Press.

The remarks appeared to reflect a widely shared view among fellow policymakers, most of whom in December had pegged a 5.00%-5.25% policy rate in the coming months. .

Mester said that for her part, she expects the Fed’s policy rate to go “a little bit higher” than that, and stay there for a while to further slow inflation.

The Fed’s benchmark overnight lending rate is currently in a target range of 4.25% to 4.50%, and investors expect the Fed to raise that rate by a quarter of a percentage point at the end of its Jan. 31-Feb. 1 meeting.

But slowing spending, inflation, and manufacturing — all reported earlier on Wednesday — helped boost expectations that the Fed will end its current round of rate hikes sooner than Mester and most of her colleagues expect, with the policy rate just shy of 5%.

The central bank started raising borrowing costs last March, when the policy rate was in the 0%-0.25% range and inflation was starting to climb to 40-year highs, repeated the Fed’s 2% target.

‘Why stall?’

Like Mester, St Louis Fed President James Bullard, speaking to the Wall Street Journal earlier, said he also sees the policy rate rising to the 5.25%-5.50% range, and said that should policy makers to get it above 5% “as quickly as possible. We can.”

Some Fed officials have signaled their support for slowing to a quarter-percentage point rate increases, after last year’s much faster pace of rate hikes in mostly 75 basis point and half point increments.

Bullard expressed more impatience. Asked if he was open to a half-percentage point hike at the Fed’s upcoming meeting, he asked “why don’t you go where we’re supposed to go? … Why stall?”

The answer can be found in part in the latest “Beige Book” report published by the Fed on Wednesday. A compilation of survey data from central bank districts across the country showed that while prices continued to rise, the pace was reported to have slowed in most districts.

And while employment continued to grow at a “moderate to moderate” pace in much of the country, and some Fed districts reported moderate economic growth, the New York Fed reported a contraction in activity, four other districts reported a slowdown or slight decline, and most of them. expecting a little growth ahead.

Still, Fed policymakers say the mistake they don’t want to make is to stop beating inflation, only to raise rates even more to get the job done later, as happened in the 1970s and 1980s.

Even Philadelphia Fed President Patrick Harker, who is less general than Mester or Bullard and wants the Fed to move to quarter-percentage-point hikes ahead, sees “a few more” increases in borrowing costs before a break.

Dallas Fed President Lorie Logan supports a slower rate hike ahead because of the uncertain outlook and the need to be flexible. But she also pointed out that the Fed may need to raise rates higher than widely expected to keep financial conditions tight enough to put pressure on inflation.

“I believe we should not be locked into a peak interest rate,” Logan said in Austin, Texas. She also said that even when inflation is firmly headed down to 2% and the Fed stops raising rates, the risks will be “two-sided” and that other rate increases may be present.

In an interview with Reuters on Wednesday, outgoing Kansas City Fed President Esther George said she felt rates would have to move higher than many of her colleagues expected, but that she would be willing to move in smaller increments. less too.

“People’s inflation expectations are getting worse,” said George, an opinion based on conversations with contacts in his Midwest district. “So I’m comfortable starting that gradual process … I’d be happy to do 25 years if I was there.”

George will retire just before the next Fed meeting and will not participate.

But she said, “we have upside risk in terms of inflation. I don’t think I’ve reached a point where I think it’s clearly falling. There are a lot of issues out there that we need to protect against.”

Fed Chairman Jerome Powell, who tested positive for COVID-19 on Wednesday and is suffering mild symptoms from the virus, said after last month’s policy meeting that the inflation battle had not been won and that more rate hikes were coming in 2023 .

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