Fed officials expect interest rates to remain high, possibly rise

© Reuters. FILE PHOTO: Atlanta Federal Reserve President Raphael Bostic speaks at a European Financial Forum event in Dublin, Ireland February 13, 2019. REUTERS/Clodagh Kilcoyne/

By Ann Saphir and Howard Schneider

-U.S. central bankers on Monday signaled they see interest rates staying high and, if anything, going higher, given inflation that may be slow to improve and an economy showing only tentative signs of weakness.

In interviews and media appearances, four regional U.S. central bank presidents began disentangling the data and risks that will feed into a June 13-14 decision about whether to raise interest rates for an 11th consecutive time or pause the tightening cycle.

Investors are betting heavily that the Fed's benchmark overnight interest rate will remain in the 5.00%-5.25% range set at the May 2-3 meeting, when policymakers opened the door to calling a halt to further increases in borrowing costs.

But Fed officials on Monday said the jury is very much out. Data since the last meeting showed a continued strong job market and little progress on the inflation front, even as risks from ongoing banking sector stress and a possible U.S. debit limit crisis argue for caution.

Overall, policymakers said ensuring inflation returns to the Fed's 2% annual target remains the top priority.

From tighter bank credit to potentially weaker household cash balances "you could tell yourself a story where inflation comes down relatively quickly ... with only a modest economic slowdown," Richmond Fed President Tom Barkin told Reuters. But "I'm not yet convinced ... I do wonder whether we're not going to need more impact on demand to bring inflation down to where we need to go."

Improvement has been fitful so far, he said, while the labor market has merely gone "from red hot to hot," with a historically low 3.4% unemployment rate.

Barkin said that with more data to arrive before the next meeting and a political standoff over the U.S. debt limit still unresolved, he remained open to either a pause or a further rate increase at the next meeting.

His comments and those of his colleagues point to an expansive debate underway within the Fed about the next step in a rate hiking cycle that began in March 2022 and has seen the policy rate ratcheted up 5 percentage points since then. More recently, the failure of three regional banks has raised the risk of broader financial stress and prompted caution among some officials.

Atlanta Fed President Raphael Bostic said that at this point he was "inclined" to pause further rate increases to be clear as to what impact tighter credit is having, with the weight of the central bank's policy changes over the last year still not fully felt.

Bostic said businesses in his southeastern U.S. Fed district "are telling me we think you're close to overdoing it ... There's a long history of the Federal Reserve overshooting their policy and driving the economy into a more negative place. I would rather avoid that if we can."

Yet even Bostic said he remained open to further rate increases if necessary.

"The easy parts of a reduction of inflation have all been handled, and now we're in the hard part," Bostic said. "The hard part is likely going to take longer to resolve."

'MORE WORK TO DO'

The main inflation indexes have dropped substantially since last year, when consumer prices at one point were increasing by 9% annually. Yet, depending on the measure, inflation remains at least double the Fed's target.

Investors have consistently bet that the central bank, due to some combination of recession or a faster-than-expected drop in inflation, will be cutting rates by later this year.

Policymakers insist that's unlikely.

"If there is going to be a bias to action, for me there would be a bias to increase a little further, as opposed to cut," Bostic said in comments to CNBC earlier on Monday.

Minneapolis Fed President Neel Kashkari said the central bank probably has "more work to do on our end, to try to bring inflation back down."

"We should not be fooled by a few months of positive data," Kashkari told the Minnesota Transportation Conference & EXPO in St. Paul, Minnesota. "We still are well in excess of our 2% inflation target, and we need to finish the job."

Chicago Fed President Austan Goolsbee told CNBC that voting for the U.S. central bank's most recent rate hike was for him a "close call" because of his worries over tightening credit conditions in the wake of the bank failures. In addition, he says the full impact of Fed rate hikes has yet to be felt.

That warrants a cautious approach, but also an open mind.

Policymakers should "be prudent and patient and watch a lot more data than we normally do," Goolsbee said. "We've got a few weeks before the next meeting."