WASHINGTON: Recent inflation data “has not been as encouraging as I would have liked”, Atlanta Fed president Raphael Bostic said yesterday, adding that the lack of month-to-month improvement in the pace of price increases warrants another 0.75 percentage point increase in the federal funds rate when policymakers meet later this month.
“The data that came in the last several months really pointed to a need for us to get closer to that neutral stance faster,” Bostic said in comments to reporters, noting that the current federal funds rate, set in a range of between 1.5% and 1.75%, is still in his view “accommodative” and encouraging economic activity.
Following the expected increase at the July meeting, “we will have to see how the economy evolves. ... I am not putting too much weight on probabilities for what we will do two, three, four meetings from now”.
Bostic in late May said he wanted to avoid “recklessness” in raising interest rates and supported sticking with the half-point rate increases that Fed officials seemed to broadly back at that point.
But when data showed inflation jumped in May, foiling hopes it had reached a peak, Bostic supported a larger three-quarter-point increase at the Fed’s June meeting, and has now backed another at the session upcoming on July 27-28.
Bostic said he was “comfortable” the US economy is strong enough to weather another large rate increase, and pointed to continued strong job gains even as higher interest rates begin to cool parts of the economy like housing.
The current situation “does not feel like a recession”, Bostic said.
Actions beyond the Fed’s July meeting, however, will depend on how the economy evolves.
“If demand comes down much faster than we expected or supply comes back, I will be comfortable pulling off” further rate increases, Bostic said.
Inflation data to be released tomorrow is expected to show consumer prices continued rising in June at a more than 8% annual rate, but “what I am looking for ... is signs that the month-to-month shift is narrowing in terms of the pace”, Bostic said.
Another US central banker said higher interest rates are needed to help cool demand and rein in sky-high inflation, but the Fed must take care not to increase too quickly,
Kansas City Fed president Esther George warned that going too fast can be “unsettling” and has raised concerns about a possible recession.
The Fed's policy-setting committee last month announced the biggest rate hike in nearly 30 years, but George dissented from the decision, preferring a smaller increase.
“Moving interest rates too fast raises the prospect of oversteering,” she said in a speech at a conference in Missouri.
George explained that markets rates already were increasing in response to the Fed’s stated intention to hike the benchmark lending rate.
“Communicating the path for interest rates is likely far more consequential than the speed with which we get there,” she said.
Some officials, including Fed governor Christopher Waller, say the committee should increase rates quickly and then reassess later in the year.
However, George said while she is sympathetic to the view the Fed needs to act fast, she cautioned that “significant and abrupt changes can be unsettling”.
“This is already a historically swift pace of rate increases for households and businesses to adapt to, and more abrupt changes in interest rates could create strains, either in the economy or financial markets,” she said, noting rising warnings about a coming recession.
In addition, given the uncertainty about how the economy will react “it is unclear just how high rates will need to move in order to bring inflation down,” she said. – Reuters, AFP