Fed officials favor keeping key rate high
WASHINGTON, D.C.: Two Federal Reserve (Fed) officials said on Monday (Tuesday in Manila) that they favored raising the United States central bank’s key rate to roughly 5 percent or more and keeping it at its peak through next year, longer than many on Wall Street have expected.
John Williams, president of the Fed Bank of New York, who is among a core group of officials around Chairman Jerome Powell, said in a speech to the Economic Club of New York that the central bank had “more work to do” to lower inflation closer to its 2-percent target.
And James Bullard, president of the St. Louis Fed, suggested that financial markets were underestimating the likelihood the Fed would have to be more aggressive in its fight against the US’ worst inflation bout in four decades.
The Fed has raised its benchmark short-term rate six times this year to a range of 3.75 percent to 4 percent, with each of the last four hikes being a historically large three-quarters of a point. The central bank is expected to raise rates by an additional half-point when it next meets in mid-December.
Though that would represent a reduction in the size of its rate hikes, Fed officials have stressed they expect to keep their key rate at a historically high level well into the future.
Because the Fed’s benchmark rate influences many consumer and business loans, its aggressive
series of hikes have made most loans throughout the economy sharply more expensive. That has been particularly true of mortgage rates, which have risen dramatically over the past year and have severely crimped home sales.
On Wednesday, Powell is scheduled to address the Fed’s policies
and their effects on the job market in a speech in Washington, D.C.
In an interview with Marketwatch, Bullard suggested that the speed of the Fed’s rate hikes wasn’t as important as the ultimate level of its benchmark rate, which he said could exceed the 5 percent that financial markets had priced in.
“Markets are underpricing the risk that the [Fed] will have to be more aggressive rather than less aggressive in order to contain the very substantial inflation that we have,” he said.
The central bank, he added, would likely have to keep its benchmark rate above 5 percent all through 2023 and into 2024. He also reiterated his view that the Fed should be prepared to raise that rate to the “lower end” of a range between 5 percent and 7 percent.
By contrast, financial markets have projected that the Fed would have to reverse course and start cutting rates by next September, presumably in response to a recession that many economists expect would occur next year.
Williams suggested that there were some positive signs that inflation was easing, noting falling prices for lumber, oil and other commodities. Supply chains are also loosening, he said: a measure of supply chain snarls maintained by the New York Fed has declined by three-quarters from its pandemic peak.
Yet the job market has stayed stronger than he expected, Williams said, with the unemployment rate, at 3.7 percent, still near a half-century low.
“That argues that we’ll need to have a somewhat higher path for interest rates” than the Fed projected in September, Williams said. At that time, the officials forecast that their benchmark rate would reach a range of 4.5 percent to 4.75 percent by early next year.
He said he now expected the unemployment rate to rise to 4.5 percent to 5 percent by the end of next year, with inflation falling to 3 percent to 3.5 percent by then.
At that level, inflation would still exceed the Fed’s target of 2 percent, thereby extending its inflation fight into 2024, Williams said.