More Rate Hikes Needed to Tame Persistent Inflation, Federal Reserve Officials Say
Two Federal Reserve officials have suggested that more rate hikes are necessary to combat inflation, which has proven to be more persistent than initially thought. Cleveland Fed President Loretta Mester believes that rates need to move up “somewhat further” and should be held at that level. While Mester has not made a decision yet about hiking rates at the next meeting, she hinted that the Fed’s next move could be to raise rates and then maintain them to gather more data.
Mester explains, “A slightly higher policy rate would roughly equate the probabilities that the next policy move will be a tightening move versus a loosening move. This would be a good holding point as we accumulate more information about whether the economy is evolving as expected.”
The central bank chose not to raise rates in its last policy meeting in June, but signaled that rates could potentially reach as high as 5.6%, implying the likelihood of two more rate hikes this year. Although some Fed officials wanted to raise rates by 0.25% in June, it was decided to pause instead, as revealed in the minutes from the Federal Open Market Committee (FOMC) meeting.
If Mester had acted alone in the last meeting, she would have voted in favor of raising rates. However, the Fed prefers to avoid surprising the markets and there was a rationale for taking a step back to evaluate the impact of previous rate hikes.
Another Fed official who supports higher rates is San Francisco Fed President Mary Daly, who believes that two more hikes are needed this year to reduce inflation. Daly acknowledged that the risks of doing too little outweigh the risks of doing too much, but emphasized that the gap between the two is narrowing.
Both Daly and Mester think that the economy is still at risk of potential credit tightening from earlier bank failures this year, even though there is currently minimal evidence of stricter lending outside of the Fed’s rate hikes.
While Mester does not see any additional tightening due to stresses in the banking industry, she acknowledges the need to monitor the situation. Daly similarly notes that the bank stresses from the failures could have amounted to the equivalent of a 0.25% or 0.50% rate hike, but so far, the impact has been less severe. Lending is currently close to expectations given the anticipation of a slowing economy, but Daly warns that it is too early to declare an all-clear.
Despite the differing opinions on the timing of rate hikes, both officials agree that inflation needs to be addressed and that the economy should be closely monitored for any potential shocks.
Click here for the latest stock market news and in-depth analysis, including events that move stocks.
Read the latest financial and business news from Yahoo Finance.