February 16 (Reuters) – Two Federal Reserve officials said on Thursday the Federal Reserve probably should have raised interest rates more than it did earlier this month, warning that further hikes in borrowing costs were essential to curbing inflation down to the desired level.
The Fed “has come a significant way in moving policy from a very accommodative stance to a hawkish stance, but I think we have more work to do,” Cleveland Fed President Loretta Mester said in a virtual speech at a Conference of the Global Interdependence Center. “The data coming in hasn’t changed my view that we need to get the fed funds rate above 5% and stay there for some time” to bring inflation back to the central bank’s 2% target.
On his Jan 31-Feb At the 1st policy meeting, the Fed decided to slow the pace of the previously violent spate of rate hikes, raising its benchmark overnight interest rate by a quarter of a percentage point to the 4.50% to 4.75% range. The central bank also signaled that more rate hikes are on the way to help bring the excessively high inflation level back to the 2% target.
But following that gathering, January data showed stronger-than-expected employment gains, raising questions about whether the job market has slowed to the extent Fed officials believe is necessary. Earlier this week, the government reported that the CPI did not weaken as much in January as economists had forecast, keeping pressure on the central bank to act further and tighten monetary policy.
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Mester, who has no voice on the policy-making Federal Open Market Committee this year, said she thought even before the jobs and CPI data were released that her peers were not aggressive enough in their recent rate hike. “I saw a compelling economic case for a 50 basis point hike,” she said.
Speaking separately to reporters, St. Louis Fed President James Bullard, who is also not holding a vote on the FOMC this year, agreed that there were good reasons the Fed would have been more aggressive in its recent rate decision. “I was a supporter of a 50 basis point hike, arguing that we should get to what the committee considered sufficiently restrictive as quickly as possible in interest rates.”
Overall, both policymakers were on the more aggressive side of the political debate. Bullard was also one of the Fed’s earliest advocates for scaling back the massive stimulus the central bank has pumped into the economy to deal with the impact of the COVID pandemic.
Mester told reporters after her remarks that she was unwilling to say how big the central bank’s rate hike is expected to be at its March 21-22 meeting. Futures markets are currently expecting another quarter point gain on March 22nd and are divided on whether the Federal Funds Rate will extend the 5.00% to 5.25% or 5.25% to 5.50 range through June % will reach.
In December, Fed policymakers set a 5.1% breakpoint for that rate this year. The central bank is due to release updated forecasts at next month’s meeting as the forecast interest rate is expected to rise to higher levels.
In a statement Tuesday, New York Fed President John Williams, Vice Chairman of the FOMC, said he thought it appropriate that the federal funds rate should be between 5.00% and 5.50% by the end of this year.
INFLATION TESTING POLICY OUTLOOK
Some other Fed officials have recently said they are comfortable with smaller rate hikes as they head towards an uncertain breakpoint for the rate hike campaign. However, some have also said that if inflation does not move significantly towards the target, the Fed may have to keep raising rates and hold them there longer.
In his presentation to a Tennessee corporate group, Bullard said “inflation remains too high but has come down,” adding that “sustained interest rate hikes can help maintain a disinflationary trend in 2023, even with sustained growth and strong labor markets.” “.
Mester said it was good that inflation is moderating and she expects it to fall further, but noted that price pressures remain problematic and that the risks of surprises to the upside on this front are still very much there. She also said the CPI data serves as a “cautionary tale” for those who believe price pressures have peaked.
She reiterated that the Fed’s actions to lower inflation “will not be without pain” as economic growth slows and the labor market suffers from slower job gains and rising unemployment. But she added that she doesn’t expect a recession.
Reporting by Michael S. Derby; Edited by Chizu Nomiyama and Paul Simao
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