By Howard Schneider and Ann Saphir
WASHINGTON (Reuters) -The Federal Reserve is "strongly committed" to fighting inflation and remains hopeful that can be done without the "very high social costs" involved in prior campaigns to control surging prices, Fed Chair Jerome Powell said on Thursday, in remarks echoed by other U.S. central bankers as they mull another potentially outsized interest rate increase.
Powell, in a 40-minute webcast interview with Cato Institute President Peter Goettler, was not asked about the U.S. central bank's policy meeting later this month, when it is expected to raise its target interest rate by either half or three-quarters of a percentage point, and the Fed chief did not volunteer any information on his preference.
However, investors in contracts tied to the Fed's policy rate currently anticipate the larger 75-basis-point increase, an expectation that rose through the day after the European Central Bank hiked its policy rate by three-quarters of a percentage point, a decline in U.S. weekly jobless claims pointed to continuing strength in the labor market, and one usually dovish Fed official indicated he was open to the idea.
The Fed "could very well do" a 75-basis-point increase at its Sept. 20-21 meeting, said Chicago Fed President Charles Evans, who has tended to be on the dovish side of monetary policy debates. That would mark the third such large increase in a row and push the Fed's target interest rate above 3% for the first time since 2008.
"We are going to have a conversation about that," Evans said. "I'm going to be listening to everybody. My mind is not made up."
Powell's remarks on Thursday were his last scheduled before a blackout period begins Saturday ahead of the September meeting, during which Fed officials refrain from making policy statements. The fact that Powell in particular did not openly undercut the likelihood of a larger rate hike made some analysts conclude it was all but a done deal.
"Chair Powell did not push back on market pricing," Bank of America (NYSE:BAC) economists observed in a note on Thursday. "We now expect a 75bp rate hike in September," up from a half-percentage-point increase previously.
The difference may be largely symbolic, with a larger rate hike this month possibly meaning smaller increases later in the year.
But it would demonstrate what Powell and his colleagues have made the Fed's core message: That they won't back down on planned rate increases even at the risk of slower growth and higher unemployment. "We need to act now, forthrightly, strongly as we have been doing, and we need to keep at it until the job is done," Powell said. "The Fed has and accepts responsibility for price stability."
The Fed's policy meeting this month will include updated economic projections along with almost certain approval of a fifth consecutive increase in the target federal funds rate.
The release of a monthly U.S. consumer price inflation report next week will be the final major piece of data for policymakers to evaluate in making that decision. While information since the Fed's July 26-27 meeting has given some small sense that the pace of inflation may be slowing from 40-year highs, that has not been enough for policymakers to feel confident yet that it has peaked.
The job market, meanwhile, remains strong, with an Atlanta Fed wage tracker showing that earnings through August grew at a 5.7% annual pace, a rate some policymakers feel is inconsistent with the Fed's 2% inflation target.
In addition to market-based expectations, more economists are also now anticipating a 75-basis-point increase this month. Economists at Jefferies and Nomura on Thursday also changed their previous view that the Fed would downshift to a half-percentage-point hike after larger increases in June and July, following on the heels of Goldman Sachs (NYSE:GS) economists on Wednesday.
"The U.S. is in a luxurious position of a continued strong labor market ... there's a very good chance the Fed can bring down inflation without causing a significant recession," said Oliver Pursche, senior vice president at Wealthspire Advisors in New York. "The economy and the labor market can absorb a 75-basis-point hike."
VOLCKER'S SHADOW
The issue confronting officials is just how high and how fast borrowing costs need to rise to control the worst outbreak of inflation since the 1980s, and whether the monetary tightening can be done without triggering a recession and steep rise in unemployment.
New research recently suggested that hopeful scenario is out of reach, with a jobless rate that may have to double from the current 3.7% to dependably lower inflation.
The updated Fed projections due to be issued at the end of this month's policy meeting will show if officials now see a risk of rising joblessness as well.
Powell said he continues to hope that can be avoided, as did Fed Vice Chair Lael Brainard in comments on Wednesday.
Evans said he thought it would not take a recession to tame inflation, and that the unemployment rate would only rise to perhaps 4.5%, a view shared by his more hawkish colleague, Cleveland Fed President Loretta Mester.
Fed Governor Chris Waller, also an advocate of the idea that unemployment need not rise dramatically for inflation to fall, is scheduled to speak on Friday, as is Kansas City Fed President Esther George.
Referring to former Fed Chair Paul Volcker's fight against inflation in the early 1980s, when Fed policy triggered a recession and the unemployment rate topped 10%, Powell noted that Volcker was trying to uproot years of rising inflation expectations that were feeding higher prices and wages.
Volcker, who was widely credited with winning that battle, "followed several failed attempts" by earlier heads of the Fed to lower inflation, Powell said.
Powell said that because inflation expectations this time remain largely anchored around the central bank's 2% target, the outcome could be better.
"We think we can avoid the kind of very high social costs that Paul Volcker and the Fed had to bring into play" in the 1980s, Powell said.