US Fed officials signal divide over whether to hike rates again

HOUSTON – Federal Reserve officials sounded divergent notes about the central bank’s next policy move, with one of its top officials suggesting another rate increase may be needed to quell inflation and its newest policymaker signalling a pause may be in order.

New York Fed president John Williams said on Tuesday that Fed officials still have more work to do to bring down prices, echoing remarks from his colleagues in recent days, and suggested they will stay the course despite new uncertainty from turmoil in the banking sector. 

Chicago Fed president Austan Goolsbee, who votes on monetary policy decisions this year, instead called for “prudence and patience” in assessing the economic impact of tighter credit conditions that are likely to stem from financial stress, the first official to suggest policymakers may need to hold off on further hikes for now.

“Given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious,” Mr Goolsbee said in prepared remarks at an event hosted by the Economic Club of Chicago. “We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.”

Mr Williams, speaking earlier in an interview with Yahoo! Finance, said Fed officials’ median forecast in March projecting one more interest rate hike this year, followed by a pause, is a “reasonable starting place” – though the path will depend on incoming economic data.

“We need to do what we need to do in order to make sure we bring inflation down,” Mr Williams said. Inflation is coming down but remains well above the Fed’s 2 per cent goal, he said.

Fed officials lifted interest rates by a quarter percentage point in March, bringing their policy benchmark to a target range of 4.75 per cent to 5 per cent, up from near zero a year earlier.

Forecasts in March showed the 18 officials expected rates to reach 5.1 per cent by the year end, according to their median projection. Investors bet the Fed will raise rates at its next meeting on May 2-3, but will cut rates later this year – something officials have not projected.

Mr Williams said the market expectations reflect forecasts for recession as well as a sharper slowdown in inflation than what most officials anticipate.

“We’re seeing signs of inflation slowing, but inflation is still very high,” he said. “Some of this core services inflation, excluding housing, that hasn’t budged yet. So, still kind of got our work cut out for us to get inflation back to 2 per cent.”

A string of bank collapses in March has added new uncertainty to the outlook this year. Still, most Fed officials have continued to emphasise their commitment to bringing prices down.

Minneapolis Fed president Neel Kashkari, who also votes on policy this year, said in March that though it will take a while to see the full effects of the banking fallout, the Fed still has more work to do to lower inflation. 

Mr James Bullard, Mr Goolsbee’s counterpart in St Louis, said steps taken to ease financial strains were working and the central bank should keep raising interest rates to fight high inflation. And Cleveland Fed chief Loretta Mester said policymakers will need to raise rates “a little bit higher” and then hold them there for some time. Neither Ms Mester nor Mr Bullard votes in monetary policy decisions this year.

Philadelphia Fed president Patrick Harker, who votes on policy this year, sounded less emphatic than some of his colleagues on the need to take more measures against inflation.

“Since the full impact of monetary policy actions can take as much as 18 months to work its way through the economy, we will continue to look closely at available data to determine what, if any, additional actions we may need to take,” Mr Harker told an audience in Philadelphia.

“But make no mistake: We are fully committed to bringing inflation back down to our 2 per cent target,” he said in his prepared remarks. BLOOMBERG