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Fed united on need for higher rates, divided over how high

Published 08/18/2022, 09:47 AM
Updated 08/18/2022, 05:11 PM
© Reuters. FILE PHOTO: San Francisco Federal Reserve Bank President Mary Daly poses at the bank’s headquarters in San Francisco, California, U.S., July 16, 2019. REUTERS/Ann Saphir/File Photo

By Ann Saphir and Howard Schneider

(Reuters) -The Federal Reserve needs to keep raising borrowing costs to bring high inflation under control, a string of U.S. central bank officials said on Thursday, even as they debated how fast and how high to lift them.

St. Louis Fed President James Bullard, who was among the central bank's earliest advocates last year of a more muscular response to fast-building price pressures, said that given the strength of the economy he is currently leaning toward supporting a third straight 75-basis-point interest rate hike in September.

"I don't really see why you want to drag out interest rate increases into next year," Bullard told the Wall Street Journal, saying he would like to get the Fed's benchmark overnight interest rate to a target range of 3.75% to 4.00% by the end of this year. The Fed's policy rate is currently 2.25%-2.50%.

Earlier on Thursday, San Francisco Fed President Mary Daly said hiking rates by 50 or 75 basis points at the Fed's next policy meeting on Sept. 20-21 would be a "reasonable" way to get short-term borrowing costs to "a little bit above" 3% by the end of this year, and on their way to a little bit higher in 2023.

The exact pace would depend on employment data, which has shown brisk growth in recent months, and inflation, Daly told CNN International. Inflation, by the Fed's preferred measure, is running at more than three times the central bank's 2% target.

With the global economic slowdown acting as a headwind on U.S. growth, she said "we have to take that into consideration as we ensure that we don't overdo policy."

Fresh data on Thursday showing a dip in the number of Americans filing for unemployment benefits last week added to evidence that, save for the fast-cooling housing market, the economy is holding up despite the steepest round of Fed rate hikes since the 1980s.

'DEFINITELY PREMATURE'

Investors may get a better read on the Fed's likely actions in coming months next Friday, Aug. 26, when Fed Chair Jerome Powell gives a highly anticipated speech on the economic outlook at the annual global central bankers' conference in Jackson Hole, Wyoming.

Powell last month held the door open to another "unusually large" rate hike at the Fed's next meeting, but also said "it likely will become appropriate to slow the pace of increases" to give policymakers time to take stock of how higher borrowing costs are affecting the economy.

Fed officials' remarks Thursday suggest an emerging split https://graphics.reuters.com/USA-ECONOMY/FED/lgpdwawwzvo in the central bank between those who want to push rates higher quickly, and those who are more cautious because of potential damage to the job market and the risk of a rise in the U.S. unemployment rate, now at 3.5%.

But both Bullard and Daly said they felt that once rates get to a certain level, the Fed will not quickly reverse course. Bullard said market expectations of rate cuts were "definitely premature." Daly said she supported a "raise-and-hold" strategy.

"The worst thing you can have as a business or a consumer is to have rates go up and then come rapidly down... it just causes a lot of caution and uncertainty," Daly said. "I do think we want to not have this idea that we'll have this large hump-shaped rate path where we'll ratchet up really rapidly this year and then cut aggressively next year - that's not what's on my mind."

Trading in futures contracts tied to the Fed's policy rate suggested investors see that rate rising to a range of 3.50%-3.75% by March of next year, but then starting to fall a few months later.

Speaking at a separate event, Kansas City Fed President Esther George said she and her colleagues would continue to debate the question of how fast to raise rates, but that they would not stop tightening policy until they are "completely convinced" that inflation is coming down.

© Reuters. FILE PHOTO: The U.S. Federal Reserve Building is pictured in Washington, March 18, 2008. REUTERS/Jason Reed/File Photo

The recent easing of U.S. financial conditions, including a surge in stock prices, may have been based on an overly optimistic sense that inflation was peaking and the pace of interest rate increases was likely to slow, she said.

Minneapolis Fed President Neel Kashkari, the most hawkish of Fed policymakers, said the central bank needs to "urgently" bring down inflation. "The question right now is, can we bring inflation down without triggering a recession?" he said at an event in Wayzata, Minnesota. "And my answer to that question is, I don't know."

Latest comments

401K not money, just digits... Fed has their mandate to fulfill.
Go ahead and destroy more 4o1k's Powell I mean it's only money.
Interesting way to phrase 8% inflation by saying more than three times 2%. Four times is still mathematically accurate.
Refered to PCE figures
No rate hike in Sept by FED...
I don't know how they could possibly not realize that they've already overshot. They need to at least pause. A 75bp rate hike would be naked stupidity
No. They need to do 3 or 4 more .75
she is nuts! this will discourage many people from buying a house. you know...the Americon dream! wait until after the elections. then take a look.
The advantage of buying at  a higher rate is that rate increases usually translate to lower purchase  price. Five to six percent is still a manageable range for home buyers and first time home buyers are eligible for a discount rate.
she is nuts! this will discourage many people from buying a house. you know...the Americon dream! wait until after the elections. then take a look.
Thanks to the Fed who continue to speculate in stocks, up, up, up
''I don't feel the pain of inflation anymore. I see prices rising but I have enough... I don't find myself in a space where I have to make tradeoffs because I have enough, and many Americans have enough.'' Fed President Mary Daly
Aka soft landing or Goldilocks scenario. X fed tightening = x growth and x inflation. Never going to happen. Keep on dreaming. Inflation will still be high when tightening is already above 3. That’s when we will all finally realize in what situation we got ourselves by creating endless free cash. Buy gold. Hedge for what’s coming
I am confused , what is going on. First go printing money without reason allowing inflation to out of control. Now , inflation is not near 2 per cent target, again fed pivot is being talked and market is pricing that. A common man can do better than FED with his common sense. Fed has become political institution and does not seems to independent any more. What is others view.
no you need smaller increments like silver
 I think the fed new what they were trying to archive. They were trying to inflate some of the government debt away and didn’t think much of inflation (transitory and supply side mainly). But later they started realizing that printing money is also adding to inflation, more than anticipated. Then Ukraine happened. Now we have too high inflation. So all 3 are policy mistakes. 1 stick to your mandate. 2 inflation is a monster you can’t control 3 always factor in external risks. So in my view the FED failed all tests and should be sacked for this mistakes. But if you do so, then markets will shortly crash. So we have fate 🙁🙁🙁
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