Fed could push interest rates higher and keep it longer, policy maker says

NEW YORK: Federal Reserve policymakers may need to raise U.S. borrowing costs above the 5.1% peak they noted last week, possibly maintaining it through 2024 to keep it out of the economy. Three of them signaled on Friday that high inflation needs to be squeezed out.

New York Fed President John Williams, San Francisco Fed President Mary Daly, and Cleveland Fed President Loretta Mester have all delivered hawkish messages to ease price pressures that erode wages and weigh on tensions. Analysts underscoring the central bank’s determination to do what it takes to save the economy, despite the potential loss of more than 1 million jobs in the process.

It also stands in stark contrast to expectations expressed in financial markets. Traders on Friday said they expected the Fed’s policy rate to peak below his 5% mark and the Fed could start cutting his rate in the second half of 2023 to ease the recession implied by the New York Fed’s own internal models. leaned to

New York Fed President Williams said he doesn’t expect a recession, but told Bloomberg Television that he “must do what is necessary” to bring inflation back to the Fed’s 2% target. He added that the peak rate “could be higher.” what we wrote down. ”

The Fed has hiked interest rates this year from near zero in March to a range of 4.25% to 4.5%. This was his sharpest rate hike since the 1980s and the last time he battled skyrocketing prices. Inflation, as recommended by the Federal Reserve, is currently hovering at 6%, three times its target of 2%.

Earlier this week, when policymakers announced the latest rate hikes, almost all forecasted that more rate hikes would be needed in the next few months, in the range of at least 5% to 5.25%. rice field.

The view surprised investors who had been encouraged by data showing inflation falling for a second month in a row, after some data suggested the Fed’s string of rate hikes was nearly complete.

The S&P 500 stock market index ended the week down about 2% on Friday as the Fed’s more hawkish stance permeated. Meanwhile, bond traders seem confident that the Fed will actually beat inflation.

Fed policymakers have welcomed the recent slowdown in inflation due to easing supply chain problems and higher interest rates that have dampened the housing market.

But they are uneasy that a strong labor market is a source of sustained price pressure.

US employers are creating hundreds of thousands of jobs each month, and the unemployment rate is as low as 3.7%. Workers are in short supply, especially after millions retired early in the pandemic, and wage growth is far beyond what the economy can sustain, policymakers say.

“I’m not sure why the market is optimistic about inflation,” said Daly of the San Francisco Fed, adding that it may be because the market is pricing in an ideal scenario. , which positions the policy against what she said are still “upside” risks to the inflation outlook.

Central bankers are becoming more outspoken that they need a slowing labor market to keep inflation down, and they won’t try to offset it with rate cuts until they’re confident they’ve done so.

Over the past few rate hike cycles, the Fed has hiked rates and held them for an average of 11 months before cutting.

“I think 11 months is a good place to start, a reasonable starting point, but we are ready to do more if we need more,” Daley said, noting that the exact timeframe will depend on the data. She said her own rate projections were in line with the peak rate of 5.1% expected by the majority of her colleagues.

The Federal Reserve has warned of an “ongoing” interest rate hike, and Daly’s remarks meant the unemployment rate would rise to 4.6% for the first time in 2024, despite analysts expecting it to rise to 4.6%. suggesting that she expects interest rates to remain high for the next few months. That means more than 1.5 million jobs lost.

As of last month, central bank economists had viewed the risk of recession to continued growth as roughly even from the minutes of the Fed’s November policy meeting.

Meanwhile, on Thursday, the New York Fed said its internal economic model projected a 0.3% decline in overall activity next year, flat growth in 2024, and a return to positive growth next year. said.

Federal Reserve policymakers this week forecast GDP growth of about 0.5% next year.

Cleveland Fed President Mester told Bloomberg Television that while it’s not a recession per se, such slow growth means that an unexpected shock could easily trigger a complete contraction over several quarters. said to do.

She reveals she is one of seven of the Fed’s 19 policymakers who believe an even higher rate hike is needed than the 5.1% median forecast released by the Fed this week. I made it

At the press conference after the December 13-14 policy meeting, Fed Chairman Jerome Powell nodded at the challenges posed by rising unemployment, if not necessarily recession.

“I wish there was a completely painless way to restore price stability,” he said. “No. This is the best we can do.”