Fed officials beat the inflation drum; “Reasonable” 50 basis point rate hike next month

Aug 3 (Reuters) – Federal Reserve officials have again expressed their determination to curb high inflation, though it was noted that a half-percentage point hike in the US central bank’s key interest rate next month could be enough to march towards that goal.

“I am assuming that 50 (basis points) would be a reasonable thing to do in September because I believe I see evidence in my contact conversations and in the observations of the world I see, that there are bright spots for me,” said the San Francisco Fed President Mary Daly in an interview with Reuters.

However, “if we only see inflation moving forward, the labor market shows no signs of slowing, then we will be in a different position where a 75 basis point hike might be more appropriate. But within 50 basis points. in my mind as I look at the incoming data, ‚ÄĚDaly added. Read more

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Whether the Fed moves forward with a third consecutive 75 basis point rate hike at the policy meeting on September 20-21 – a pace unmatched in more than a generation – or backs off a bit is of paramount interest to investors, businesses and investors. consumers who increasingly fear that the central bank’s fight against inflation could trigger a recession.

Following Daly’s remarks, investors in futures contracts tied to the Fed’s benchmark overnight interest rate have reduced the likelihood that the central bank would raise the policy rate by 75 basis points next month.

Fed Chairman Jerome Powell said last week that the central bank might consider another “unusually large” rate hike at its September meeting, with officials guided in their decision-making by more than a dozen critical data. they cover inflation, employment, consumer spending, and economic growth in between. Read more

Several politicians, including Daly, have this week shown a firm resolve to continue the aggressive monetary tightening, with nearly all uniformly signaling that the central bank remains determined to push through rate hikes until it sees strong evidence and that inflation is on its way back to the Fed’s 2% target.

For months, inflation has confused expectations of an easing and now, by the Fed’s preferred measure, it is more than three times the target.

‘A VERY IMPROBABLE SCENARIO’

In a separate aspect, Minneapolis Fed Chairman Neel Kashkari echoed Daly’s comments this week that it is extremely unlikely the central bank will move towards cutting interest rates in 2023.

“Some financial markets are indicating that they expect us to cut interest rates next year,” Kashkari said at an event held as part of a financial regulation conference in New York.

“I don’t mean it’s impossible, but it looks like it’s a very unlikely scenario right now, given what I know about the underlying inflation dynamics. The more likely scenario is that we will continue to rise (interest rates) and then sit up. until we have much confidence that inflation is returning to 2%, “Kashkari added.

St. Louis Fed Chairman James Bullard also said the central bank will be steadfast in raising rates to bring inflation down.

“We’re going to be tough and make that happen,” Bullard said in an interview with CNBC. “I think we can take decisive action and go back to 2%.” Read more

This will likely entail the need to keep rates “higher for longer” in order to gather sufficient evidence that inflation is falling sustainably, Bullard said, noting that policymakers will need to see evidence that key measures and inflation fundamentals are “convincingly coming” before any disruption.

Bullard previously said he wants the Fed’s policy rate to rise between 3.75% and 4.00% this year to help keep inflation down.

Speaking in Virginia, Richmond Fed Chairman Thomas Barkin said the central bank made it clear that it “will do what it takes”, warning that inflation will subside, but “not immediately, not suddenly and not in an instant. predictable way “. Read more

For his part, Daly told Reuters that raising the policy rate to 3.4% by the end of this year “is a reasonable place to think about how to get there” and dismissed the claim that the rate hikes Fed rates from here, which would take it further. The collective judgment of policy makers on the long-run “neutral interest rate” should be considered “restrictive”.

“Not in my judgment,” Daly said, arguing that the level of interest rates at which the Fed is actively hampering growth and activity is closer to 3%.

“When you think of 2.5%, that’s the long-run neutral interest rate, but inflation is high right now,” Daly added. “And there’s a lot of demand chasing a tight supply, so obviously the neutral rate is high. So my estimate of where it would be right now is about or just over 3%, maybe 3.1%.”

“So, in my judgment, we’re not even up to neutral right now,” Daly said.

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Lindsay Dunsmuir and Dan Burns Reports; Editing by Paul Simao and Will Dunham

Our Standards: Thomson Reuters Trust Principles.

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