Hike again? take a pause Fed officials are divided on what to do next to fight inflation

WASHINGTON (AP) — The stubbornness of high inflation The Federal Reserve is swearing over how to manage interest rates in the months ahead, making the outlook for the Fed’s policies more bleak than at any time since it unleashed a series of 10 consecutive rate hikes starting in March 2022.

Many Fed watchers expected central bank officials to forgo another hike in the benchmark interest rate When they meet next in mid-June. After recent warnings from many officials With regard to the continuing threat of high inflation indicates that this outcome is highly uncertain.

On Thursday, Dallas Fed President Lori Logan said she believed the economic data so far did not support the central bank’s pause in interest rate hikes next month.

“Data in the coming weeks may show that it is appropriate to skip a meeting,” Logan said in written notes to the Texas Bankers Association. “As of today, though, we’re not quite there yet.”

On inflation, she said, “we haven’t made the progress we need to make.”

No Fed official has gone so far as to suggest that the Fed is likely to cut interest rates this year. By contrast, financial markets continued to bet that policymakers would feel compelled to cut interest rates twice by the end of 2023.

“They’d like to wait and pause, but … if necessary, further hikes are an option,” said Kathy Bostancic, chief economist at Nationwide. “It comes down to the fact that inflation is still very high.”

However, this sentiment is not unanimous among Fed officials. Some stressed the need to halt interest rate increases for an extended period. The idea is to give rate increases time to exert their full effects on growth and inflation. Behind this view is the concern that if the Fed continues to make borrowing costs more expensive, it could cause a deep recession.

More clarity may arrive on Friday, when Chairman Jerome Powell speaks at a Federal Reserve economic conference.

The Fed, in its most aggressive series of interest rate increases since the 1980s, has raised the key rate by a whopping 5 percentage points in the past 14 months. These increases have more than doubled mortgage rates and pushed up the costs of auto loans, credit card borrowing, and business loans. Home sales fell.

Most of the new Fed speakers have suggested that policymakers will keep interest rates unchanged this year and possibly raise them further. On Tuesday, Atlanta Fed President Rafael Bostick warned that the Fed was prepared to keep interest rates high to bring inflation down to its 2% target, even if unemployment begins to rise steadily and critics accused the central bank of deviating from its path. Economy.

“We haven’t gotten to the hard part yet,” Bostick said at an Atlanta Fed-sponsored conference in Amelia Island, Florida. “There will be tension and pressure and pressure from many different constituencies, and we collectively have to be prepared to be firm and hold the course.”

A day earlier, Bostick had told CNBC that “inflation is not going to go down very quickly” and that “if there is a bias towards action, there will be a bias of increasing slightly rather than decreasing.”

In April, inflation eased to 4.9% compared to the previous year From 5% in March – the tenth consecutive such decline and a sharp drop from a peak of 9.1% last June. However, much of this decline reflects slower increases or outright falls in the prices of volatile commodities, such as food and gas.

In contrast, measures of core inflation pressures showed less improvement. Excluding food and energy prices, the so-called core inflation eased to 5.5% in April from 5.6% in March and from a peak of 6.6% last September. But it hasn’t fallen at all since January.

“Inflation appears to be flat in a lot of places, and that’s a cause for concern,” said Diane Swonk, chief economist at KPMG.

Also Thursday, Philip Jefferson, a member of the Federal Reserve Board of Governors, painted a somewhat bleak view of inflation. Jefferson noted that one measure of prices that Powell tracks closely — an index that covers prices for services such as restaurants, hotels, and medical care but not energy or housing — has been “stubbornly high,” and “shows no signs of a significant decline yet.”

But he also noted that the Fed should take time to assess the impact its policies have had so far.

“History shows that monetary policy operates with long and variable delays, and that a year is not long enough for demand to feel the full impact of higher interest rates,” Jefferson said in written notes.

(Jefferson was nominated last week by President Joe Biden in second place on the Federal Reserve Board, succeeding Lyle Brainard, who became a senior adviser to the White House).

Other senior Fed officials have taken a more optimistic view. John Williams, president of the Federal Reserve Bank of New York and a close adviser to Powell, suggested on Tuesday that inflation had peaked and was “gradually moving in the right direction.”

For now, Williams said, the Fed needs to monitor upcoming economic data to assess how its policies will impact the economy.

Austin Goolsby, President of the Federal Reserve Bank of Chicago, expressed hope on Tuesday that the central bank could achieve what some analysts called “clean inflation.” Under this scenario, the current interest rate hike by the Fed will continue to slow inflation without an accompanying rise in unemployment or recession.

Since the Fed started raising interest rates, the unemployment rate has already fallen to 3.4%, which is the lowest level in 54 years. Usually, a sharp rise in borrowing costs is expected to lead to layoffs and high unemployment rates.

Goolsby noted, however, that supply shortages helped accelerate inflation last year, even when the unemployment rate was still high, a scenario that defies textbook economics.

As a result, Goolsby added hopefully, “the unraveling of this negative supply-side element gives us some potential for a soft landing,” which is “definitely unusual.”

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