Federal Reserve Officials Beat Inflation Drums; A “reasonable” 50 basis point rate hike next month

(Reuters) – Federal Reserve officials again expressed determination on Wednesday to rein in high inflation, though one indicated that a key rate hike next month by the US central bank might be enough to move toward that goal.

“I start from the idea that 50 (basis points) would be a reasonable thing to do in September because I think I see evidence in my communication conversations, and in the notes of the world that I see, that there are some bright spots,” said Mary Daly, president of the San Francisco Fed. Francisco, in an interview with Reuters.

However, “if we saw inflation progressing unabated, and the labor market showing no signs of slowing, we would be in a different position where a 75 basis point increase might be more appropriate. But I go with 50 in mind when I look at the incoming data.” Read more

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Whether the Fed will go ahead with its third consecutive rate hike of 75 basis points at its September 20-21 policy meeting — a pace unmatched in more than a generation — or call back is of central importance to investors and businesses. And corporate consumers increasingly fear that the central bank’s fight against inflation will lead to a recession.

After Daly’s comments, investors in futures contracts linked to the Fed’s benchmark interest rate reduced the likelihood that the central bank will raise the policy rate by 75 basis points next month.

Federal Reserve Chairman Jerome Powell said last week that the central bank might consider an “extraordinarily large” rate hike at its September meeting, with officials guiding their decision-making by more than a dozen critical data points covering inflation, employment, consumer spending and economic growth between now. And later. Read more

Several policymakers, including Daly, have shown a strong determination this week to continue aggressive monetary tightening, with almost all of them signaling uniformly that the central bank remains intent on pressing ahead with rate hikes until it sees strong and long-term evidence that inflation On the way back to the Fed’s 2% target.

Inflation has long confused expectations that it will decline and is now, by the Fed’s preferred metric, more than triple the target.

‘A very unlikely scenario’

In a separate appearance, Minneapolis Fed President Neil Kashkari echoed Daly’s comments this week that the central bank is highly unlikely to focus on cutting interest rates in 2023.

“Some financial markets are indicating that they expect us to cut interest rates next year,” Kashkari said at an event held as part of the Financial Regulatory Conference in New York.

“I don’t want to say it’s impossible, but that seems like a very unlikely scenario at the moment given what I know about underlying inflation dynamics. The most likely scenario is that we will keep raising (interest rates) and then sit there until we have a lot of confidence that inflation in way down to 2%.”

James Bullard, president of the Federal Reserve Bank of St. Louis, said the central bank would be consistent in raising interest rates to bring down inflation again.

“We’re going to be strong and make it happen,” Pollard said in an interview with CNBC. “I think we can take strong action and get back to 2%.” Read more

That will likely involve keeping rates “high for a longer period” in order to gather enough evidence that inflation is falling in a sustainable way, Bullard said, noting that policymakers will have to see evidence that key and core measures of inflation are coming “convincingly down.” before any stop.

Bullard previously said he wants the Fed’s policy rate to rise to between 3.75% and 4.00% this year to help stamp out inflation.

Speaking in Virginia, Richmond Fed President Thomas Barkin said the central bank had made it clear it would “do what it takes” as he warned inflation would subside but “not immediately, not suddenly and unexpectedly.” Read more

For her part, Daly told Reuters a rate hike to 3.4% by the end of this year “is a reasonable place to think we’re going to get there” and declined to stress that the Fed’s rate hike from here – which would take her further. The collective judgment of policy makers on the long-term “neutral interest rate” should be considered “restrictive”.

“Not in my estimation,” Daly said, noting that the rate level at which the Fed impedes growth and activity is close to 3%.

“When you think of 2.5%, that’s the long-term neutral interest rate, but inflation is high right now,” Daly added. “And there’s a lot of demand chasing the limited supply, so the neutral rate is high of course. So my own estimate of where it’s going to be now is around or just over 3%, maybe 3.1%.”

“So in my estimation, we’re not even on the fence right now,” Daly said.

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(Reporting by Lindsey Dunsmuir and Dan Burns) Editing by Paul Simao and Will Dunham

Our Standards: Thomson Reuters Trust Principles.

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