NEW YORK - Federal Reserve policymakers emphasised on Monday that they will raise borrowing costs further to curb inflation, with one key official saying that he sees interest rates heading somewhat higher than he forecast just a couple of 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,” Federal Reserve Bank of New York 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.”
At a separate event, Federal Reserve Bank of St Louis president James Bullard, one of the central bank’s most hawkish officials, said he thinks “markets are underpricing a little bit the risk that the FOMC (Federal Open Market Committee) will have to be more aggressive rather than less aggressive to contain the very substantial inflation that we have in the US”.
Fed officials have signalled they plan to raise their benchmark rate by 50 basis points at their final meeting of the year on Dec 13-14, after four successive 75 basis-point hikes. Policymakers could also raise their forecasts – though it is not clear by how much – for how high rates will eventually go when they update their economic projections during the meeting.
In an interview with Bloomberg Television, Federal Reserve Bank of Richmond president Thomas Barkin said he favoured 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 am very supportive of a path that is slower, probably longer and potentially higher than where we were before,” Mr Barkin said. He added that he expects peak rates “certainly” to be higher than he thought a couple months ago.
The main rate is currently in a target range of 3.75 per cent to 4 per cent. Investors see it peaking around 5 per cent in 2023, according to pricing in futures contracts.
Dr Williams, who also serves as vice-chair 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, that 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, Federal Reserve Bank of Cleveland president Loretta Mester said in an interview with the Financial Times, published on Monday, that the central bank was not yet near a pause in its rate-hike campaign.
Dr Williams, in a virtual event hosted by the Economic Club of New York, said his “baseline view is that we are going to need to raise rates further from where we are today” and that “we are going to need to keep restrictive policy in place for some time”, at least through 2023.
Mr 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 per cent to 7 per cent range to meet policymakers’ goal of being restrictive enough to stamp out inflation near a four-decade high.
“We have to avoid that temptation here and really stay with restrictive level of the policy rate longer to be sure that we are pushing inflation back to the 2 per cent target,” he said.
Minutes from the Nov 1-2 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 on 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.
Later on Monday, Federal Reserve vice-chair Lael Brainard said US central bankers must lean against the risk of inflation expectations rising above the 2 per cent target in a world where inflation may be less stable than in recent decades.
“In the presence of a protracted series of supply shocks and high inflation, it is important for monetary policy to take a risk-management posture to avoid the risk of inflation expectations drifting above target,” she said.
“A drawn-out sequence of adverse supply shocks that has the cumulative effect of constraining potential output for an extended period is likely to call for monetary policy tightening to restore balance between demand and supply.”
The Fed said Dr Brainard’s presentation was an updated version of the June 24 comments made during a Bank for International Settlements conference in Basel, Switzerland. BLOOMBERG
