Fed officials call for more rate hikes to beat inflation

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Jan 18 (Reuters) – Federal Reserve officials signaled on Wednesday they would continue with further interest rate hikes, with several supporting a top rate of at least 5% even as inflation shows signs of having peaked and economic activity is slowing down.

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

The comments appeared to reflect a view widely shared among his fellow policymakers, most of whom in December had forecast a benchmark interest rate of 5.00% to 5.25% in the coming months.

Mester said he, for his part, expects the Fed’s benchmark rate to need to go “a little bit higher” than that and stay there for some time to slow inflation further.

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 31st meeting. from January to February. 1 meeting.

But the slowdown in spending, inflation and manufacturing – all reported on Wednesday – helped fuel expectations that the Fed will end its current round of rate hikes sooner than Mester and most of his colleagues expect, with the interest rate less than 5%.

The central bank started raising borrowing costs in March, when the benchmark interest rate was in the 0% to 0.25% range and inflation was starting to pick up, hitting 40-year highs, several times the 2019 target. % of the Fed.

‘WHY STOP?’

Like Mester, the chairman of the St. we can.”

Several Fed officials voiced support for slowing down to quarter-point rate hikes, following last year’s much faster pace of rate hikes mostly in increments of 75 basis points and half a point.

Bullard expressed more impatience. Asked if he was open to a half percentage point increase at the Fed’s next meeting, he asked “why not go where we should go? … Why stall?”

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

And while employment continued to grow at a “modest to moderate” pace across much of the country, and several Fed districts reported modest economic growth, the New York Fed reported a contraction in activity, four other districts reported slowdowns or slight declines. , and most expected little growth ahead.

Still, Fed policymakers say the mistake they don’t want to make is stopping short of defeating inflation, only to have to raise rates further to get the job done later, as they did in the 1970s and 1980s.

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

Dallas Fed President Lorie Logan also supports a slower pace of rate hikes given the uncertain outlook and the need for flexibility. But she also signaled that the Fed may need to raise rates higher than expected to keep financial conditions tight enough to put pressure on inflation.

“I don’t believe we should lock ourselves into a maximum interest rate,” said Logan in Austin, Texas. She added that even when inflation drops convincingly to 2% and the Fed stops raising rates, the risks will be “bilateral” and that further rate hikes could be on the horizon.

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

“People’s expectations of inflation are starting to come down,” said George, an observation based on conversations with contacts in his Midwest district. “So I’m comfortable starting that downsizing process… I’d be happy to do 25s if I were there.”

George will retire shortly before the next Fed meeting and will not attend.

But she added: “We still have an upside risk for inflation. I don’t think I’ve gotten to a point where I think it’s clearly going downhill. There are enough problems out there to say we have to guard against them.”

Fed Chair Jerome Powell, who tested positive for COVID-19 on Wednesday and is showing mild symptoms of the virus, said after last month’s policy meeting that the inflation battle had not been won and that further hikes of interest would come in 2023.

Reporting by Lindsay Dunsmuir in Scotland, Howard Schneider in Washington, Michael S. Derby in New York and Ann Saphir in Berkeley, California. Edited by Paul Simao and Matthew Lewis

Our Standards: Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the US Federal Reserve, monetary policy and economics, graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the Washington Post local staff.

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