San Francisco Fed president Mary Daly said “we are still resolute and completely united” in the objective of getting inflation down around the 2% inflation target.
NEW YORK: Federal Reserve (Fed) officials effectively pushed back against a narrative in financial markets over the past week that policy makers are envisioning a pivot away from tightening amid evidence of a turn in the economy.
Four Fed district-bank presidents highlighted in remarks that there was no sign yet of inflation easing.
San Francisco Fed president Mary Daly said “we are still resolute and completely united” in the objective of getting inflation down around the 2% inflation target.
Remarks from Daly, Cleveland’s Loretta Mester and Chicago’s Charles Evans helped trigger a surge in Treasury yields, as traders reconsidered how much more the central bank will raise interest rates and whether it could move to cut them in early 2023.
Yields had tumbled after chair Jerome Powell said July 27 “it likely will become appropriate to slow the pace of increases” as the Fed’s stance tightens further.
Mester told the Washington Post during a live-streamed event she wanted to see “very compelling evidence” that month-to-month price increases were moderating before she could say the US central bank’s tightening cycle was accomplishing its goal of curbing inflation.
Evans, speaking with reporters at his bank, said policy makers were “probably at least a couple of reports away” from seeing the kind of improvement in the inflation data that would reinforce the notion that they were on the right track with monetary tightening.
The central bank’s policy-setting Federal Open Market Committee (FOMC) raised its benchmark rate by three quarters of a percentage point last week for the second straight month.
This marked the most aggressive back-to-back increases in more than a generation to tame inflation.
Data since then have showed US gross domestic product (GDP) contracted for the second consecutive quarter in the April-to-June period.
This met the threshold that some economists use as a rule of thumb to judge that the economy has fallen into a recession.
Powell told reporters after the July 27 decision that officials could increase rates by the same amount at the next meeting – depending on readings from the economy between now and then – though they would slow at some point in the future. The FOMC next gathers Sept 20-21.
“I really am looking to see what those data tell us to see if we can downshift a little bit the pace of rate hikes, or if we need to continue” the outsize increases, Daly said in an interview on LinkedIn.
Economists surveyed by Bloomberg before last week’s decision said they expected the FOMC to lift rates by a half point in September, then shift to quarter-point hikes at the remaining two meetings of the year.
That would bring the upper range of the central bank’s policy target to 3.5% by the end of 2022, the highest level since early 2008.
Speaking at an event in New York, St Louis Fed president James Bullard reiterated that the central bank probably should increase its benchmark rate to a range of 3.75% to 4% by the end of the year.
Evans said he was hopeful that a path to a 3.5% federal funds rate by the end of the year via a half-point increase at the September meeting and quarter-point increases at policy meetings in November and December was “still reasonable.”
If inflation doesn’t show signs of improvement, the FOMC “might have to rethink the path a little bit higher, but I would be a little nervous about responding too much, too early,” he said.
Last week, before the release of GDP data, Powell pushed back on suggestions that the US was already in a recession. — Bloomberg
