Senior Federal Reserve officials tried to quell speculation that the Federal Reserve would resist the task of putting much more pressure on the economy and warned against over-exuberance about the inflation outlook despite signs it has peaked.
Just days after the central bank slowed the pace of monetary tightening and raised the federal funds rate by half a percentage point, the heads of the New York and San Francisco branches of the Federal Reserve countered what they described as “optimistic.” investors’ view that elevated inflation will almost disappear next year, especially after recent positive data.
While New York Fed President John Williams acknowledged that price pressures will ease, he expressed concern that inflation is slowing down across the “core” service sector, which eliminates volatile energy and food costs and the continued strength of the economy Labor market reflects as far would prove harder to eliminate.
“We have a couple of factors that I think will bring inflation down to 3-3.5 percent next year, but the real problem is how do we get it to 2 percent [per cent]’ Williams said in an interview with Bloomberg Television on Friday.
San Francisco Fed Chair Mary Daly stressed that the Fed still has a “long way” to go before declaring victory over inflation and said risks to further price pressures are still on the upside to tend. The central bank will continue to squeeze the economy until the job on inflation is “well and really done,” it said at an event on Friday hosted by the American Enterprise Institute.
In particular, Daly said she needs to see moderate inflation in core services once housing-related costs are dissipated.
Most officials expect a fed funds rate of 5.1 percent to bring inflation down, according to forecasts released on Wednesday, while a large cohort signaled it may need to top 5.25 percent. That compares to the September median estimate of 4.6 percent, when the projections were previously updated.
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“We need to do what is necessary — again sufficiently restrictive — to bring inflation down to 2 percent, and it could be higher than what we’ve noted,” Williams said, echoing a message from Chairman Jay Powell at his final news conference of the year on Wednesday.
“I’m willing to do more if more is needed,” Daly said when asked how much more restraint the Fed might need to exercise on the economy. “We have to be data dependent. We can project, but then we have to watch.”
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However, investors still seem skeptical as traders in the Fed fund futures markets continue to bet that the central bank will not have to hike interest rates above 5 percent. They have also confirmed bets that the Fed will ease policy and cut interest rates next year.
No Fed official was planning a rate cut next year, with the federal funds rate not expected to drop to 4.1 percent until 2024.
A warning from the European Central Bank of further rate hikes as it and the Bank of England hiked interest rates slammed global equities on Thursday, sending the S&P 500 its biggest daily decline since early November.
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