U.S. Federal Reserve officials commented on Thursday whether recent data showing higher-than-expected inflation, employment and spending were an “anomaly” or a sign that even higher interest rates may be needed to curb rising prices.
Separate comments from Fed Governor Christopher Waller and Atlanta Fed President Raphael Bostic raised a fundamental question for the next phase of the Fed’s battle to reduce inflation: Is monetary policy lagging behind in the face of a surprisingly strong economy that needs even tighter credit conditions? Or is slower growth and inflation already underway?
So far, even hardening supporters like Waller say it’s not clear yet, and that data on jobs and inflation released between now and the Fed’s next meeting on March 21-22 are likely to be key to deciding whether he and perhaps other policymakers are leaning toward higher interest rates.
“Last month we received a flood of data that has called into question my opinion … that the Federal Open Market Committee was making progress in moderating economic activity and reducing inflation,” Waller said in remarks Thursday to the Coalition of Midsize Banks of America, an organization of about 100 financial institutions with assets of between $10 billion and $000 billion.
“It could be that progress has stalled, or it’s possible that the figures released last month were an anomaly,” he said.
Waller said that if the upcoming data show a moderation in the economy and a slowdown in inflation, it would “support” an increase in the Fed’s interest rate rate to about the same point forecast by policymakers in December, when 13 of the 19 leaders expected rates to be between 5.1% and 5.4%.
The current interest rate is between 4.5% and 4.75%.
“On the other hand, if the data remain too high, the monetary policy target range will have to be raised further this year to ensure that the existing momentum is not lost,” Waller said.
Bostic also said he was willing to raise rates if upcoming data did not show inflation heading “clearly” back towards the central bank’s 2% target from its January level of around 5.4%.
But he also considered that the impact of the Fed’s rate hikes so far may only be beginning, a reason to be cautious when deciding on further rate hikes, in order to prevent the central bank from overdoing it.
“The appropriate course of action is going to be slow and steady,” Bostic told reporters, with perhaps only two more quarter-point hikes needed before the Fed can pause.
The Federal Reserve’s rate hikes “should last until the spring … Going at a moderate pace reduces the likelihood that we will overdo it” and damage the economy.