Interest rates are likely to be raised a “couple” of more times this year as inflation is still far too high, says the head of the Federal Reserve Bank of San Francisco.
Despite price pressures slowing, San Francisco Fed Bank President Mary Daly believes the institution needs to continue raising interest rates, a policy decision that requires a balancing act amid a plethora of challenges, be it the national economy or the banking stresses.
But for inflation to return to the U.S. central bank’s 2 percent target rate and remain there for a sustainable, long-term period, “a couple more rate hikes will be necessary.”
“Inflation is our No. 1 problem,” Ms. Daly stated at a Brookings Institution event on July 10, adding that “we could end up doing more” than the June Summary of Economic Projections’ median two additional rate hikes.
According to Ms. Daly, the biggest surprise in the current quantitative tightening cycle has been the economy not slowing more, considering what the Fed has done since March 2022. However, during her conversations with businesses across the country, individuals will say there are indicators that the economy is slowing.
At the June Federal Open Market Committee (FOMC) policy meeting, officials voted to leave rates unchanged in the range of 5.00 percent and 5.25 percent for the first time in 11 meetings. The thinking behind this decision was for policymakers to pause and assess current economic conditions and determine how the Fed’s measures have impacted the overall economy.
The futures market is anticipating that the central bank will pull the trigger on a quarter-point hike to the benchmark fed funds rate at this month’s meeting, according to the CME FedWatch Tool.
Comments by Ms. Daly, who is not a voting member of the rate-setting committee, are similar to that of her Fed colleagues, who also delivered remarks on July 10.
Core Inflation Progress ‘Stalling’
The U.S. economy is showing greater underlying strength than many had initially anticipated, while inflation has been stubbornly high. But progress on core inflation, which strips the volatile energy and food sectors, is “stalling,” says Cleveland Fed President Loretta Mester.
In a speech at the University of California San Diego, Ms. Mester championed higher interest rates because inflation could remain above the Fed’s 2 percent target for four years.
“Core measure indicates that inflation is stubbornly high and broad-based,” she stated.
“In order to ensure that inflation is on a sustainable and timely path back to 2 percent, my view is that the funds rate will need to move up somewhat further from its current level and then hold there for a while as we accumulate more inflation on how the economy is evolving.”
Speaking before the House Financial Services Committee in his semi-annual monetary policy report, Fed Chair Jerome Powell warned that “the process of getting inflation back down to 2 percent has a long way to go.”
The regional central bank chief noted that wage growth has been too high and productivity has also been too low, suggesting that earnings need to moderate to achieve the Fed’s goals.
In June, annualized average hourly earnings were flat at 4.4 percent, higher than the consensus estimate of 4.2 percent. In the first quarter of 2023, non-farm business sector labor productivity tumbled by 2.1 percent. On a yearly basis, productivity has contracted for five consecutive quarters, the longest period since the Bureau of Labor Statistics (BLS) initiated this series in 1948.
Meanwhile, Ms. Mester has had a different experience in her discussions with business leaders, with many showcasing greater optimism.
“Most think there won’t be a recession this year, and many think that, even if demand slows down some more, a recession will be avoided or will be very mild,” she said.
The June FOMC policy minutes highlighted that staff economists anticipate a “mild recession” later this year. The Atlanta Fed’s GDPNow model estimate shows the U.S. economy expanding by 2.3 percent in the second quarter.
‘Be Patient’
The Federal Reserve can be patient now that the national economy is slowing down, says Atlanta Fed Bank President Raphael Bostic.
“I have the view that we can be patient—our policy right now is clearly in the restrictive territory,” he said during an appearance at the Cobb County Chamber of Commerce in Atlanta on July 10. “We continue to see signs that the economy is slowing down, which tells me the restrictiveness is working.”
Mr. Bostic alluded to the recent June jobs report, which confirmed a smaller-than-expected 209,000 new positions. He added that inflation continues to be “too high” and that the central bank needs to get inflation “back to our 2 percent target.”
Still, the data point to inflation steadily returning to this level, and inflation expectations remain at around 2 percent.
“I am comfortable being patient,” he said.
The June consumer price index (CPI) report will be released on July 12. The Cleveland Fed Nowcasting model estimates that the annual inflation rate and core CPI will ease to 3.2 percent and 5.1 percent, respectively.
