February 14 (Portal) – The Federal Reserve will need to gradually raise interest rates to beat inflation, three Federal Reserve officials said on Tuesday, as two of them pointed out that borrowing costs may eventually need to be higher than currently generally expected.
“We must remain prepared to continue raising interest rates for a longer period of time than previously anticipated if such a path is necessary to respond to changes in the economic outlook or to offset an unwanted easing of conditions,” Dallas Fed President Lorie Logan said in a statement Speech in Texas.
The Fed’s key interest rate is currently in a target range of 4.50% to 4.75%. A key US government report earlier Tuesday showed that consumer prices accelerated on a monthly basis in January, although annual increases continued to moderate.
Neither Logan nor Richmond Fed Chairman Thomas Barkin, speaking in an interview on Tuesday, took a clear signal from the Consumer Price Index (CPI) report, noting instead that general price pressures remain elevated.
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“It’s about as expected,” Barkin told Bloomberg TV when asked for the latest CPI data, warning that it will take a while for inflation to get back close to the 2% target fed is coming Inflation is still at an annualized rate of 5.0% on the Fed’s preferred measure.
“Inflation is normalizing, but it’s slowly declining,” Barkin said. “I just think there’s going to be a lot more inertia, a lot more persistence about inflation, than we might all want.”
Philadelphia Fed President Patrick Harker said during a speech in Philadelphia on Tuesday that the inflation news hadn’t changed his view that rates need to rise above 5%.
“How much over 5%? It’s going to depend a lot on what we see… today we had an inflation report that was good in that it’s moving down, but not fast,” Harker said, even as he added that the Fed was “probably about to”, reach a high enough level to take a break.
Harker last week pointed to the prospect of rate cuts in 2024 should inflation ease further.
‘SELF-FULFILLING SPIRAL’
The Fed raised interest rates further last year, and faster than at any time since the 1980s, to fight inflation, and policymakers signaled they expected the federal funds rate to rise to at least 5.1% before the policy would be “sufficiently restrictive” to reduce price pressure.
However, following Tuesday’s CPI release, interest rate futures traders now see the Fed raising borrowing costs three more times, pushing interest rates into the 5.25% to 5.50% range through July, if not June. is brought. That’s an increase of only about equal odds of prices getting this high early Tuesday.
Logan continued to point to some upside risk to their forecast. “Even after we have sufficient evidence that we do not need to raise rates at a future meeting, we must remain flexible and tighten further if changes in the economic outlook or financial conditions warrant it.”
The key, Logan said, will be another significant slowdown in wage growth and a better “balance” in what is now an “incredibly strong” job market. The unemployment rate fell to 3.4% in January, the lowest level since 1969.
While there has been progress on inflation, with a moderation particularly in commodity prices and more recently in housing, she said more is needed, particularly in the prices of core non-housing services. Without an improvement, Logan said inflation could end up at 3%, above the Fed’s target.
“The main risk I see is that if we tighten too little, the economy will remain overheated and we won’t be able to keep inflation under control,” Logan said. “That could trigger a self-fulfilling spiral of unanchored inflationary expectations that would be very costly to stop.”
There are also risks, she said, of going too far and weakening the labor market more than necessary to slow inflation.
“My own view is that given the risks, we shouldn’t commit to a peak rate or an exact rate path,” she said.
When asked if it was still the case that the Federal Reserve was risking doing too little rather than too much, Barkin also tended to suppress inflation as a priority, although he added that incoming data would guide the Fed .
“I feel like the risk at this point is more on the inflation side than the economic side,” Barkin said. “If inflation calms down, we may not go quite as far, but if inflation is well above our target, we may need to do more.”
Reporting by Lindsay Dunsmuir and Ann Saphir; Edited by Chizu Nomiyama and Paul Simao
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