March 22 (Reuters) – Federal Reserve officials are helping to shape market expectations for sharper rate hikes to stem the rise in inflation, but have failed to allay fears that the tightening cycle will leave a hole in the economy and could tear the job market.
“The Fed needs to be aggressive to keep inflation under control,” St. Louis Fed President James Bullard told Bloomberg TV on Tuesday, urging the central bank to raise its federal funds rate to 3% this year .
Bullard disagreed last week when the rest of his peers agreed to raise the federal funds rate by just a quarter of a percentage point from the near-zero level it’s been at since March 2020.
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“Faster is better,” he said on Tuesday, and that view seems to be gaining ground now.
On Monday, Fed Chair Jerome Powell said the central bank must act “quickly” to hike rates. When asked what would prevent the central bank from raising interest rates by half a percentage point at the May 3-4 monetary policy meeting, he replied: “Nothing.” Read more
“Some” of the remaining six Fed meetings this year will likely require big rate hikes, Cleveland Fed President Loretta Mester said Tuesday, noting the lingering impact of entangled supply chains on prices and echoing Powell’s concern that the Russian war in Ukraine will increase on already excessive inflation.
“I find it appealing to frontload some of the required increases earlier rather than later in the process because that puts policy in a better position to adapt if the economy turns out differently than expected,” she said.
By the end of the year, Mester said rates should be around 2.5% and rates would need to rise further next year to bring down inflation.
San Francisco Fed Chair Mary Daly is among the Federal Reserve’s more dovish policymakers and was not asked about a possible half-point rate hike at a virtual event at the Brookings Institution early Tuesday.
But she said she wants to push rates higher, to neutral levels and maybe above, to avoid embedding high inflation. Read more
All said they believe higher borrowing costs could also cool super-hot labor demand without hurting job growth.
The comments have led futures markets to a flurry of bets on a half-point rate hike in May and June. Traders now expect the federal funds rate to rise to the 2.25% to 2.5% range by the end of the year — less than Bullard’s view but higher than the 1.9% forecast by the Fed last week became.
US one dollar banknotes are seen in front of the displayed stock chart in this illustration dated February 8, 2021. REUTERS/Dado Ruvic/Illustration
Powell argued that the economy was strong enough to withstand higher borrowing costs without hurting the job market, arguing that the best the Fed could do to ensure continued strength in the job market was to get inflation under control.
But traders are also now taking bets that the Fed will start cutting rates by 2024, futures pricing shows.
“The bond market absolutely doesn’t believe Powell’s economic optimism: it tells us that if the Fed goes down Powell’s path, a soft landing will not only be challenging, it will be impossible,” wrote Roberto Perli, economist at Piper Sandler.
‘HAWKISH PIVOT’
It looks to be getting off to a rocky start for the Fed’s first round of rate hikes in three years, especially given the way its policymakers are communicating it.
Ahead of last week’s rate hike, Powell said the Fed would act “cautiously” amid widespread uncertainty about the impact of Russia’s invasion of Ukraine on the US economy.
In his press conference following the release of the Federal Open Market Committee’s (FOMC) policy statement and forecasts, Powell said the Fed must respond “quickly” to the evolving outlook. Continue reading
And this week, the Fed chair downplayed concerns about the potential dip in economic growth, focusing far more on the likelihood that the war in Ukraine could exacerbate US inflation, which has hit a 40-year high and is about three times the central bank’s 2%. Goal.
The changes, wrote NatWest economist Kevin Cummins, may reflect Powell’s ongoing personal “hawk” that began in late 2021.
“In the near term, Powell’s comments are obviously not the last word on the magnitude of the expected rate hike in May, given that the May FOMC meeting is only six weeks away and the Fed’s actions will be driven by the data,” Cummins wrote .
They may also reflect a broader understanding within the Fed that rates can go quite a long way and not plunge the economy into a downturn, a feat the Fed accomplished in the 1990s — especially with labor markets as strong as they are now.
Job openings are near an all-time high, and employers are fighting so hard to hire, even from competitors, that Mester says one of her directors is calling it the “great poaching.”
Mester said she was “very optimistic” that the Fed could reduce excess demand for labor without reducing economic activity or jobs.
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Reporting by Lindsay Dunsmuir and Ann Saphir; Edited by Paul Simao and Richard Pullin
Our standards: The Thomson Reuters Trust Principles.
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