The Federal Reserve needs to keep raising borrowing costs to bring high inflation under control, a string of US central bank officials said on Thursday, even as they debated how fast, and how high, to lift them.
St. Louis Fed President James Bullard, who was among the central bank's earliest advocates (last year) of a more muscular response to fast-building price pressures, said that given the strength of the economy, he is currently leaning toward supporting a third straight 75-basis-point interest rate hike in September.
"I don't really see why you want to drag out interest rate increases into next year," Bullard told the Wall Street Journal, saying he would like to get the Fed's benchmark overnight interest rate to a target range of 3.75 per cent to 4.00 per cent by the end of this year. The Fed's policy rate is currently 2.25 - 2.50 per cent.
Earlier on Thursday, San Francisco Fed President Mary Daly said hiking rates by 50 or 75 basis points at the Fed's next policy meeting on September 20-21 would be a "reasonable" way to get short-term borrowing costs to "a little bit above" 3 per cent by the end of this year, and on their way to a little bit higher in 2023.
The exact pace would depend on employment data, which has shown brisk growth in recent months, and inflation, Daly told CNN International. Inflation, by the Fed's preferred measure, is running at more than three times the central bank's 2 per cent target.
With the global economic slowdown acting as a headwind on US growth, that "we have to take that into consideration as we ensure that we don't overdo policy", she said.
Fresh data on Thursday showing a dip in the number of Americans filing for unemployment benefits last week added to evidence that — save for the fast-cooling housing market — the economy was holding up, despite the steepest round of Fed rate hikes since the 1980s.
Investors may get a better read on the Fed's likely actions in the coming months next Friday, August 26, when Fed Chair Jerome Powell gives a highly anticipated speech on the economic outlook at the annual global central bankers' conference in Jackson Hole, Wyoming.
Last month, Powell held the door open to another "unusually large" rate hike at the Fed's next meeting, but also said "it likely will become appropriate to slow the pace of increases" to give policymakers time to take stock of how higher borrowing costs are affecting the economy.
Fed officials' remarks on Thursday suggest an emerging split in the central bank between those who want to push rates higher quickly, and those who are more cautious because of potential damage to the job market and the risk of a rise in the U.S. unemployment rate, which is now at 3.5 per cent.
However, according to both Bullard and Daly, once rates get to a certain level, the Fed will not quickly reverse course. Bullard said market expectations of rate cuts were "definitely premature". Daly said she supported a "raise-and-hold" strategy.
"The worst thing you can have as a business or a consumer is to have rates go up and then come rapidly down ... it just causes a lot of caution and uncertainty," Daly said.
"I do think we want to not have this idea that we'll have this large hump-shaped rate path where we'll ratchet up really rapidly this year and then cut aggressively next year — that's not what's on my mind."
Trading in futures contracts tied to the Fed's policy rate suggested investors see that rate rising to a range of 3.50 - 3.75 per cent by March of next year, but then starting to fall a few months later.
Speaking at a separate event, Kansas City Fed President Esther George said that she and her colleagues would continue to debate the question of how fast to raise rates, but that they would not stop tightening policy until they were "completely convinced" that inflation was coming down.
The recent easing of US financial conditions, including a surge in stock prices, may have been based on an overly optimistic sense that inflation was peaking, and the pace of interest rate increases was likely to slow, she said.
Minneapolis Fed President Neel Kashkari, the most hawkish of Fed policymakers, said that the central bank needed to "urgently" bring down inflation.
"The question right now is, can we bring inflation down without triggering a recession?" he said at an event in Wayzata, Minnesota.
"And my answer to that question is, I don't know."
Global equities have taken a severe body blow in recent weeks, as central banks struggle to rein in stubbornly-high inflation
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