Federal Reserve officials are becoming increasingly skeptical about suspending interest rate hikes

Washington, D.C. (CNN) It’s been a busy week of public engagements for senior Fed officials. One thing became clear: there was an intense debate about whether to raise again or stop at the next meeting.

Some officials worry that inflation is not cooling down fast enough, which could prompt an 11th consecutive rate hike when policymakers meet in June. Officials have not expressed concerns about the sharp deterioration in credit conditions, and some have said they remain open to a pause.

“So far, the data continues to support the committee’s view that lowering inflation will take time,” Federal Reserve Chairman Jerome Powell said Friday in a moderated discussion with former central bank chief Ben Bernanke. However, he noted that there is continued uncertainty about the amount of demand that will be eroded by tightening credit conditions and the delayed effects of higher interest rates. Wall Street took that as a pause on the table.

Earlier this month, Fed officials voted unanimously to raise the benchmark lending rate by a quarter point to a range of 5-5.25%, while noting the possibility of a pause ahead. The Fed launched its most aggressive campaign to raise interest rates since the 1980s in March 2022 to fight inflation that has remained stubbornly high.

Although price increases have subsided in recent months, some officials this week questioned whether the economy was heading for 2% inflation.

“I keep an open mind and closely monitor economic developments as we head into the next meeting in mid-June,” Dallas Fed President Lori Logan said at a banking conference Thursday in Texas. “I still worry about whether inflation is coming down fast enough,” she said. Logan is a voting member of the Federal Reserve Committee that decides interest rates.

Pausing to raise interest rates in response to recession fears is reminiscent of the “stop and go” strategy employed by the Fed in the 1970s, when the central bank alternated between raising interest rates to stave off inflation and stopping them to support growth at the same time. The Fed succeeded in neither when it did, and inflation has instead held at elevated levels.

Inflation remains a thorn in the Fed’s side

Fighting inflation remains the Fed’s top priority, even after a rapid rise in interest rates led to the collapse of three banks in the past two months. Fed officials describe the sector as still “healthy and resilient” and have voted twice to raise interest rates since the collapse of the Silicon Valley bank in March and the failure of the First Republic just days before the Fed’s meeting in May.

But instability in the banking sector has led to some tightening in credit conditions, which, economists say, could essentially play the same role as a rate hike by slowing investment.

“There is still a lot of the impact of the 500 basis points that we did last year that is yet to come, and you add that there are tight credit conditions, and I think we have to be more aware,” Chicago Fed President Austin Goolsby told CNBC in an interview. A recent interview. “We need to take that into account and the only way to do that is to sit back and watch it.”

The closely watched core indicator of the Fed’s favorite inflation measure, the personal consumption expenditures index, showed only a slight decline in March, up 4.6% that month from a year ago, and down slightly from the 4.7% growth recorded in February. Similarly, the CPI also showed a slight slowdown in the headline reading in April.

“I do expect inflation to decline, but it has been slower than I would have liked, and it may take some insurance by raising interest rates somewhat to make sure that we really get inflation under control,” said James Bullard, President of the Federal Reserve Bank of St. Louis. The Financial Times in an interview Thursday. Bullard does not vote on interest rate decisions this year.

Booming job market

A strong labor market is fueling consumer spending and the Fed is trying to calm inflation by curbing demand. Employers added a solid 253,000 jobs in April and average hourly earnings rose 0.5% in that month. The labor cost index showed that compensation gains rebounded in the first quarter.

“Maybe we at the Fed have more work on our side to try to get inflation down again,” Minneapolis Fed President Neel Kashkari, a voting member, said Monday at a conference in Minnesota. “The labor market is still hot, and we haven’t seen much of a softening in the labor market. So, that tells me we have a long way to go before we get inflation back down.”

Powell echoed a similar view on the role of the labor market in elastic price pressures.

“I think the sluggish labor market is likely to be an important factor in inflation going forward,” he said on Friday.

Data gauging the labor market is due in a few weeks, and the consumer price index report on the first day of the Fed’s two-day meeting in June will inform officials on the path to inflation and the broader economy. Of course, Fed officials’ thinking about monetary policy could change drastically if the US defaults on its debt, which could happen as soon as June 1st.

“You have questions about the debt ceiling and the potential impact of that. You have questions about tightening credit and how important that is, so I think it gives you time and discretion to say either that there’s still more we need to do,” Richmond Fed President Thomas Barkin told Bloomberg in an interview Tuesday. That, let’s do more, or it’s still good to wait and we’ll wait a little bit.”

Fed officials always state that their views on interest rates depend largely on what economic indicators show, and they resist taking an absolute stance on how they vote. Powell said on Friday that communication about the central bank’s future monetary policy actions “sometimes comes at a cost of misinterpretation and may also limit flexibility.”

“We’ve come a long way in tightening policy and the policy stance is constrained and we face uncertainty about the lag effects of our tightening so far, and about the extent of credit tightening from the recent bank pressures,” Powell said.

“So our guidance today is limited to identifying the factors that we will monitor as we assess the extent to which it may be appropriate to stabilize the additional policy to bring inflation back to 2% over time.”