U.S. Federal Reserve officials on August 30 restated their support for additional interest-rate increases to tame inflation, with the prominent chief of the New York Fed saying the central bank will possibly require to get its policy rate “somewhat above” 3.5% and maintain it there through the end of 2023.
New York Fed chief John Williams told the Wall Street Journal:
“I see us needing to kind of hold a policy stance – pushing inflation down, bringing demand and supply into alignment – it’s going to take longer, will continue through next year. Based on what I’m seeing in the inflation data, and what I’m seeing in the economy, it’s going to take some time before I would expect to see adjustments of rates downward.”
The Fed in March started what’s become the biggest round of rate hikes since the 1980s, and Fed Chair Jerome Powell last week clarified that he and fellow monetary policymakers are ready to lift borrowing costs as high as necessary to limit growth and curb inflation that’s currently running at more than triple the Fed’s 2% goal.
Doing so, he said, will potentially mean a weaker labor market and pain for businesses and households; but letting inflation remain high would lead to even worse damage, he said.
Williams, who as vice chair of the Fed’s rate-setting panel plays a major role in guiding monetary policy, said that the central bank’s decision on whether to implement a third consecutive 75-basis-point rate hike in September or a smaller 0.5% hike will be determined by the incoming data, which comprises Friday’s monthly jobs report and the consumer price index reading just days ahead of the Sept. 20-21 meeting.
But September’s decision will also, William said, depend on policymakers’ sentiments of where they think interest rates will need to be by the end of 2022. Williams said:
“If based on the data it’s clear that we need to get interest rates significantly higher by the end of the year, then obviously that informs a decision at any given meeting. We’re going to need to have restrictive policy for some time – this is not something that we’re going do for a very short period of time and then change course; it’s really more about getting policies to the right place to get inflation down and keeping it in this position” to achieve the Fed’s 2% inflation goal.”
The Fed’s current target range for the benchmark Fed funds rate is 2.25-2.50%. In June, the last time the central bank posted a summary of policymakers’ rate-path expectations, U.S. central bankers saw rates increasing to 3.4% by the end of this year.
Financial markets are pricing in a sharper rise. Futures contracts connected to the Fed policy indicate trader bets that rates will increase 1.5% further by the end of 2022. There are three remaining policy-setting meetings this year, including September’s.
Atlanta Fed President Raphael Bostic wrote in an essay published Tuesday on the regional bank’s website:
“I don’t think we are done tightening. Inflation remains too high. That said, incoming data – if they clearly show that inflation has begun slowing – might give us reason to dial back … We will have to see how those data come in. Inflation by the Fed’s approved measure reduced to 6.3% in July, a drop from 6.8% in the previous month, but price pressures continued to be “stubbornly widespread.”
Additional data show major segments of the economy remain tight – including data posted on Tuesday showing job openings remained elevated through July, a likely indication of continued wage pressures.
Bostic deemed the overall picture “fuzzy,” and said that while embarking on the path of inflation, he was also aware that moving too aggressively to hike interest rates also had risks.
“Moving either too aggressively or too timidly has downsides,” Bostic wrote, with rooted soaring inflation impending if the Fed does not extract it from the economy, and lost growth and rising unemployment the outcome of “severe policy tightening.”
To Richmond Fed President Thomas Barkin, it is evident the Fed needs to hike interest rates, although exactly how much in September will depend on the upcoming jobs and inflation reports.
“I’m not going to prejudge it,” Barkin told Yahoo Finance, adding that the Fed does require to get rates “into restrictive territory” to curb inflation.
