Fed officials beat the inflation drum;  “Reasonable” 50 basis point rate hike next month

Fed officials beat the inflation drum; “Reasonable” 50 basis point rate hike next month

Aug 3 (Reuters) – Federal Reserve officials on Wednesday expressed renewed determination to contain high inflation, although it was noted that a half-percentage-point hike in the Fed’s benchmark interest rate U.S. central bank next month could be enough to make progress toward that goal.

“I’m assuming that 50 (basis points) would be a reasonable thing to do in September because I believe I see evidence in my contact conversations, and in the observations of the world that I see, that there There are positives for me,” San Francisco Fed President Mary Daly said in an interview with Reuters.

However, “if we just see inflation soaring undeterred, with the labor market showing no signs of slowing, then we’ll be in a different position where a 75 basis point increase might be more appropriate. But I accept the 50 in mind when I look at the data coming in,” Daly added.

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Whether the Fed makes a third straight 75 basis point rate hike at its Sept. 20-21 policy meeting — a pace not seen in more than a generation — or backs off a bit is of central interest. for investors, businesses and consumers who are increasingly concerned that the central bank’s fight against inflation could trigger a recession.

After Daly’s remarks, investors in futures tied to the Fed’s benchmark overnight interest rate reduced the likelihood of the central bank raising the key rate by 75 basis points next month.

Fed Chairman Jerome Powell said last week that the central bank could consider another “unusually large” rate hike at the September meeting, with officials being guided in their decision-making by more than one dozen critical data points covering inflation, employment, consumer spending and economic growth in between. Read more

Several policymakers, including Daly, showed a heightened resolve this week to continue aggressive monetary tightening, with almost all uniformly signaling that the central bank remains committed to continuing rate hikes until it sees solid and lasting evidence that inflation is on track to return to the Fed’s 2% target.

Inflation has for months defied expectations that it will subside and now stands, by the Fed’s preferred measure, at more than three times the target.

“A VERY LIKELY SCENARIO”

In another appearance, Minneapolis Fed President Neel Kashkari echoed Daly’s comments this week that the central bank is extremely unlikely to turn to an interest rate cut in 2023.

“Some financial markets are indicating that they expect us to cut interest rates next year,” Kashkari said at an event at a financial regulation conference in New York. .

“I don’t want to say it’s impossible, but it seems like a very unlikely scenario at the moment given what I know about underlying inflation dynamics. The most likely scenario is that we would continue to raise (interest rates) and then we would sit there until we were confident that inflation was on track to come back down to 2%,” Kashkari added.

St. Louis Fed Chairman James Bullard also said the central bank would be committed to raising rates to bring inflation down.

“We’re going to be tough and make it happen,” Bullard said in an interview with CNBC. “I think we can take strong action and get back to 2%.” Read more

That will likely involve keeping rates “higher for longer” to gather enough evidence that inflation is sustainably falling, Bullard said, noting that policymakers will need to see evidence that headline and core measures of inflation “arriving”. down convincingly” before any release.

Bullard has previously said he wants the Fed’s key rate to rise to between 3.75% and 4.00% this year to help stifle inflation.

Speaking in Virginia, Richmond Fed President Thomas Barkin said the central bank had made it clear it would “do the right thing” by warning that inflation would recede but “not immediately, not suddenly and unpredictably”. Read more

For his part, Daly told Reuters that raising the policy rate to 3.4% by the end of this year “is a reasonable place to think about getting there” and dismissed the claim as saying. which Fed rate hikes from here – which would take it beyond the collective judgment of policymakers on the long-term “neutral interest rate” – should be considered “restrictive”.

“Not in my view,” Daly said, saying the level of interest rates at which the Fed is actively hampering growth and activity is closer to 3%.

“When you think of 2.5%, that’s the long-term neutral interest rate, but right now inflation is high,” Daly added. “And there’s a lot of demand looking for a limited supply, and so of course the neutral rate is high. So my own estimate of what it would be right now is around or a little over 3%, maybe 3.1%.”

“So in my opinion, we’re not even neutral right now,” Daly said.

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Reporting by Lindsay Dunsmuir and Dan Burns; Editing by Paul Simao and Will Dunham

Our standards: The Thomson Reuters Trust Principles.

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