By Michael S. Derby and Howard Schneider
(Reuters) - Two Federal Reserve officials said on Thursday the U.S. central bank likely should have lifted interest rates more than it did early this month, and warned that additional hikes in borrowing costs are essential to lower inflation back to desired levels.
The Fed "has come an appreciable way in bringing policy from a very accommodative stance to a restrictive one, but I believe we have more work to do," Cleveland Fed President Loretta Mester said in a virtual speech to a Global Interdependence Center conference. "The incoming data have not changed my view that we will need to bring the fed funds rate above 5% and hold it there for some time" in a bid to get inflation back to the central bank's 2% target.
At its Jan. 31-Feb. 1 policy meeting, the Fed opted to moderate the pace of what had been a torrid barrage of rate hikes and lifted its benchmark overnight interest rate by a quarter of a percentage point to the 4.50%-4.75% range. The central bank also signaled more rate hikes are coming to help lower overly high inflation levels back to the 2% target.
But in the wake of that gathering, data showed unexpectedly strong job gains for January that raised questions as to whether the labor market has slowed to the degree Fed officials believe is necessary. Earlier this week, the government reported the consumer price index in January did not moderate as much as economists had forecast, keeping pressure on the central bank to act further to tighten monetary policy.
Mester, who does not have a vote on the policy-setting Federal Open Market Committee this year, said she thought even before the release of the jobs and CPI data that her colleagues were not being aggressive enough with their most recent rate hike. "I saw a compelling economic case for a 50-basis-point increase," she said.
In a separate conversation with reporters, St. Louis Fed President James Bullard, who also does not hold a vote on the FOMC this year, agreed there was a good case for the Fed to have been more aggressive with its recent rates decision. "I was an advocate for a 50-basis-point hike and I argued that we should get to the level of rates the committee viewed as sufficiently restrictive as soon as we could."
Both policymakers have on balance been on the more hawkish side of the policy debate. Bullard was also one of the Fed's earliest advocates for rolling back the massive amount of stimulus the central bank pumped into the economy to tackle the impact of the COVID pandemic.
Mester told reporters after her remarks that she's not ready to say how big a rate hike the central bank should deliver at its March 21-22 meeting. Futures markets are currently eyeing another quarter-percentage-point increase on March 22 and are split as to whether the federal funds rate will hit the 5.00%-5.25% or 5.25%-5.50% range by June.
In December, Fed policymakers penciled in a 5.1% stopping point for that rate this year. The central bank is due to release updated forecasts at next month's meeting, amid expectations the projected rate will climb to a higher level.
In comments on Tuesday, New York Fed President John Williams, who is vice chair of the FOMC, said it appeared reasonable to him for the federal funds rate to be between 5.00% and 5.50% by the end of this year.
INFLATION TESTS POLICY OUTLOOK
Some other Fed officials have said recently they are comfortable with smaller rate rises as they proceed toward an uncertain stopping point for the hiking campaign. But some have also said it is possible the Fed may have to raise rates further and keep them there for longer if inflation does not start moving meaningfully toward the target.
In his presentation to a business group in Tennessee, Bullard said "inflation remains too high but has declined," adding that "continued policy rate increases can help lock in a disinflationary trend during 2023, even with ongoing growth and strong labor markets."
Mester said it was good that inflation was moderating and she expects it to fall further, but noted that price pressures remain problematic, and that the risks of upside surprises on that front are still very much in place. She also said the CPI data serves as a "a cautionary tale" for those who believed price pressures had peaked.
She reiterated that Fed actions aimed at lowering inflation "will not be without some pain," with economic growth retreating and the job market suffering smaller job gains and rising unemployment. But she added that she doesn't expect a recession.