Federal Reserve officials reinforced Chair Jerome Powell’s message that half-point interest-rate increases are on the table in June and July, but a larger move of 75 basis points could be warranted later in the year.
“We don’t rule out 75 forever,” Cleveland Fed President Loretta Mester said in an interview Tuesday on Bloomberg Television with Michael McKee. “When we get to that point in the second half of the year, if we don’t have inflation moving down we may have to speed up.”
Stocks retreaded on her remarks to Bloomberg, with the S&P 500 erasing its advance after climbing almost 2%.
The Fed raised rates by a half point last week, marking the largest single hike since 2000, and Powell said similar moves were on the table for the next two meetings. Officials also announced they would start shrinking their US$9 trillion ($12.52 trillion) balance sheet from June 1 at a pace that will step up quickly to US$95 billion a month.
Mester earlier told Yahoo! Finance that raising rates by a half point at the next two meetings of the US central bank “makes perfect sense” as officials battle surging inflation. That echoed New York Fed President John Williams, who also noted that the Fed would be shrinking its balance sheet at the same time.
“That means that we are actually removing accommodation pretty quickly through that channel. And that gives us a little space to move in something like a 50 basis-point increment at the next couple of meetings,” he told reporters in Eltville, Germany.
See also: Fed cuts rates by half point in decisive bid to defend economy
“As we watch the data over the remainder of the year, we’re going to have to adjust course and take the policy actions that are appropriate,” added Williams, a member of Powell’s leadership team.
Financial markets have swung violently as investors bet on the US central bank’s ability to cool the hottest inflation in 40 years without crashing the economy.
See also: Fed to hold interest rates steady but start considering cuts
Policy makers have voiced optimism they can ease price pressures without triggering a recession, though Williams said a “soft landing” may lead to somewhat higher unemployment than the 3.6% reported in April.
“When I think of a ‘soft landing,’ it’s really a matter of ‘Yes, we could see growth below trend for a while, and we definitely could see unemployment moving up somewhat, but not in a huge way’,” Williams said. “I would not define a soft landing as unemployment staying at 3.6%. I would define it as really maintaining a healthy, strong labor market while inflation is coming down.”
Still, critics say they’ve still been to slow to act against inflation and slammed the chair’s decision to also declare officials weren’t currently considering a larger 75 basis-point increase -- which had been floated as an option by Fed hawk James Bullard of St. Louis -- as a mistake.
The Fed’s preferred inflation measure rose 6.6% in March, and Russia’s invasion of Ukraine -- along with another round of virus lockdowns in China -- could keep prices firm. Powell in his press conference last week said the Fed can slow demand but added that it doesn’t have the tools to improve supply.
“That will be a challenge, no doubt, because there are a lot of things affecting inflation now on the supply side that are not really affected by monetary policy,” said Mester. “But we’re really committed to doing what we need to do with our policy tools to get demand better aligned with that constrained supply.”
Officials say they want to raise rates to the so-called neutral level that neither speeds up nor slows down the economy, which they estimate lies between 2% and 3%, and then assess if they need to go further.
“I don’t care what the reasons are, inflation’s too high and it’s my job to get it down,” Fed Governor Christopher Waller told the Economic Club of Minnesota, who said the Fed was raising rates to cool demand. “We have a labour market that’s so hot, so overstimulated, that it’s a market where you can pull back a lot of demand for labour, and it would actually be a good thing.”
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Not ‘Shock and Awe’
On the other hand, Waller said that “this is not a shock-and-awe Volcker moment,” referring to the dramatic action taken by then-Fed Chair Paul Volcker to defeat runaway inflation in the 1980s.
Richmond Fed President Thomas Barkin, echoing the determination of his colleagues to cool prices, said they can avoid economic pain inflicted by the central bank back then.
“You might ask if this path requires a Volcker-like recession. Not necessarily. At 83 basis points, we are still far from the level of interest rates that constrains the economy,” he told the Cecil County Chamber of Commerce in Maryland.
“Once we get in the range of the neutral rate, we can then determine whether inflation remains at a level that requires us to put the brakes on the economy or not,” he said.
Atlanta’s Raphael Bostic, who backs raising rates in half-point steps at the next two or three meetings and then assessing, later told a Fed conference on Florida’s Amelia Island that if the gap between excess demand and constrained supply shrinks quickly enough, the central bank may end up having to do less than otherwise.
“Inflation is driven by this imbalance between high demand and low supply and a lot of the dynamics we have in play, the forces that are pushing us, could actually hit the demand side as well,” he said, citing uncertainty caused by the war in Ukraine.
“If that gap starts to narrow -- and there are many sources that could drive that -- then we might be able to do less in our policy. And I think there is benefit to us being purposeful and intentional but not just running to get to a number.”
