(Reuters) – Federal Reserve policymakers signaled on Wednesday that they would press ahead with rate hikes, with many supporting a higher interest rate of at least 5% even as inflation shows signs of peaking and economic activity slows.
“I think we need to continue, and we’ll discuss at the meeting how much more needs to be done,” Loretta Mester, president of the Cleveland Federal Reserve, said in an interview with The Associated Press.
The remarks appeared to reflect a view widely shared among fellow policymakers, most of whom as of December had posted a 5.00%-5.25% policy rate in the coming months.
For her part, Mester said she expects the Fed rate to need to go “a little bit higher” than that, and stay there for a while to further slow inflation.
The Fed’s overnight lending rate is currently in its target range of 4.25% to 4.50%, and investors expect the Fed to raise that rate by a quarter of a percentage point at the end of January-February 31. one meeting.
But slowing spending, inflation and manufacturing — all reported earlier Wednesday — helped fuel expectations that the Fed will end its current round of rate hikes sooner than Meester and most of her colleagues expect, with an interest rate just shy of 5%.
The central bank began raising borrowing costs last March, when the policy rate was in the 0%-0.25% range and inflation was beginning to pick up that would send it to a 40-year high, several times the Fed’s 2% target.
Like Mester, St. Louis Fed President James Bullard, speaking with the Wall Street Journal earlier, said he also sees the policy rate rising to the 5.25%-5.50% range, and added that policymakers should get past 5% “as soon as possible.” What we can do.”
Several Fed officials have expressed support for a slowdown to rate hikes of a quarter of a percentage point, after a much faster pace of rate hikes last year in increases of 75 and a half basis points.
Pollard expressed impatience. Asked if he was open to a half-percentage-point increase at the next Fed meeting, he asked “Why don’t we go where we’re supposed to go? … Why procrastinate?”
The answer can be found in part in the latest “beige book” report released by the Federal Reserve on Wednesday. Compilation of survey data from central bank districts across the country showed that while prices continued to rise, a slowing pace was reported in most areas.
And while employment continued to grow at a “modest to moderate” pace in most parts of the country, and several federal districts reported modest economic growth, the Federal Reserve Bank of New York reported a contraction in activity, four other provinces reported a slowdown or slight decline, and most expected growth little in the future.
However, Fed policymakers say the mistake they don’t want to make is to stop beating inflation, only to have to raise interest rates more to do the job later, as they did in the 1970s and 1980s.
Even Philadelphia Fed President Patrick Harker, who is generally considered less hawkish than Mester or Bullard and wants the Fed to pivot to quarter-percentage-point increases in the future, sees “more” increases in borrowing costs before a pause.
Dallas Federal Reserve Bank President Lori Logan also supports a slowdown in future rate hikes due to the uncertain outlook and the need to be flexible. But she also indicated that the Fed may need to raise interest rates higher than widely expected to keep financial conditions tight enough to pressure inflation.
“I think we shouldn’t be keeping interest rate peaks,” said Logan in Austin, Texas. She added that even once inflation convincingly heads down to 2% and the Fed stops raising interest rates, the risks would be “two-sided” and more rate hikes could be imminent.
In an interview with Reuters on Wednesday, outgoing Kansas City Fed President Esther George said she felt rates should move higher than many of her colleagues expected, but she was also willing to move in smaller increments.
“People’s expectations of inflation are starting to come down,” George said, an observation based on conversations with people in the Midwest where she lives. “So I’m comfortable starting this step-down process… I’d be happy to do the 25 seconds if I were there.”
George will retire right before the next meeting of the Federal Reserve and will not participate in it.
But, she added, “we still have the risk of rising inflation. I don’t think I’ve gotten to a point where I think it’s clearly declining. There are enough issues to say we have to guard against it.”
Fed Chairman Jerome Powell, who tested positive for COVID-19 on Wednesday and is experiencing mild symptoms from the virus, said after last month’s policy meeting that the battle for inflation was not won and more rate hikes were coming in 2023.
Reporting by Lindsey Dunsmuir in Scotland, Howard Schneider in Washington, Michael S. Derby in New York and Anne Safire in Berkeley, California Editing by Paul Simao and Matthew Lewis
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