Federal Reserve says more rate hikes coming

Williams suggests a modestly higher path to cuts

“We have to avoid that temptation here and really stay with the restrictive level of the policy rate longer.”

James Bullard

NEW YORK: US Federal Reserve (Fed) policymakers are emphasising that they will raise borrowing costs further to combat inflation, with one key official predicting that interest rates will rise slightly higher than he predicted just a few months ago.

“Stronger demand for labour, stronger demand in the economy than I previously thought, and then somewhat higher underlying inflation, suggest a modestly higher path for policy relative to September,” New York Fed president John Williams told reporters on Monday after an event hosted by the Economic Club of New York.

“Not a massive change, but somewhat higher,” he said.

At a separate event, St Louis Fed president James Bullard, one of the central bank’s most hawkish officials, said he thinks that “markets are underpricing a little bit the risk that the Federal Open Market Committee (FOMC) will have to be more aggressive rather than less aggressive in order to contain the very substantial inflation that we have in the United States.”

Fed officials have signalled they plan to raise their benchmark rate by 50 basis points at their final meeting of the year on Dec 13 and 14, after four successive 75-basis-point hikes.

Policymakers could also raise their forecasts for how high rates will eventually go when they update their economic projections during the meeting, though it’s not clear by how much.

In an interview with Bloomberg Television, Fed Bank of Richmond president Thomas Barkin said he preferred slowing the pace of rate hikes in recognition of past aggressive moves, while adding that the peak may need to be held for longer at potentially higher levels to dampen inflation.

“I’m very supportive of a path that is slower, probably longer, and potentially higher than where we were before,” Barkin said.

He added that he expects peak rates to be “certainly” higher than he thought a couple months ago.

The main rate is currently in a target range of 3.75% to 4%. Investors see it peaking around 5% next year, according to pricing in futures contracts.

Williams, who also serves as vice-chairman of the policy-setting FOMC, mused about a path to eventual rate cuts but said that moment is at least a year away.

“I do see a point, probably in 2024, where we’ll start bringing down nominal interest rates because inflation is coming down and we would want to have real interest rates appropriately positioned,” he said.

While the latest projections, from September, do show Fed officials expect interest rate cuts in 2024, policymakers have largely shied away from discussing forecasts that far out, instead focusing on the need to raise rates and keep them elevated to ensure inflation falls.

Also, Cleveland Fed president Loretta Mester said in an interview with the Financial Times, published on Monday, that the central bank wasn’t yet near a pause in its rate-hike campaign.

Williams, in a virtual event hosted by the Economic Club of New York, said his “baseline view is that we’re going to need to raise rates further from where we are today” and that “we’re going to need to keep restrictive policy in place for some time,” at least through 2023.

Bullard, in a webcast interview with Marketwatch and Barron’s, reiterated his view that the Fed needs to at least reach the bottom of the 5% to 7% range to meet policymakers’ goal of being restrictive enough to stamp out inflation that is near a four-decade high.

“We have to avoid that temptation here and really stay with the restrictive level of the policy rate longer, in order to be sure that we’re pushing inflation back to the 2% target,” he said.

Minutes from the November gathering showed widespread support among officials for calibrating their moves, with a “substantial majority” agreeing it would soon be time to slow the pace of rate increases.

But views around how high they will eventually need to lift borrowing costs were less clear, with “various” policymakers seeing a case for going somewhat higher than expected.

Also on Monday, Fed vice-chairlady Lael Brainard said US central bankers must lean against the risk of inflation expectations rising above the 2% target in a world where inflation may be less stable than in recent decades. — Bloomberg