(Bloomberg Opinion) — Federal Reserve officials issued diverging notes on the central bank’s next policy move, with one of its top officials suggesting another rate hike may be needed to quell inflation and its new lawmaker saying a pause might be in order.
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New York Fed President John Williams said Tuesday that Fed officials still have more work to do to cut prices, echoing comments from his colleagues in recent days, and suggested they will keep the course despite the new uncertainty due to the turmoil in the banking sector.
Chicago Fed President Austan Goolsbee, who votes on monetary policy decisions this year, called instead for “prudence and patience” in assessing the economic impact of tighter credit conditions likely to result from financial stress, the first official to suggest that authorities may need to postpone further hikes for now.
“Given the uncertainty that abounds about where these financial headwinds are going, I think we need to be cautious,” Goolsbee said in prepared remarks at an event hosted by the Economic Club of Chicago. “We should collect more data and be careful about raising rates too aggressively until we see how much work headwinds are doing for us to reduce inflation.”
Williams, speaking earlier in an interview with Yahoo! Finance, said the median forecast from Fed officials in March projecting one more interest rate hike this year, followed by a pause, is a “reasonable starting point,” though the path will depend on incoming economic data. .
“We need to do what we have to do to make sure we bring inflation down,” Williams said. Inflation is coming down but remains well above the Fed’s 2% target, he said.
Fed officials raised interest rates by a quarter of a percentage point last month, raising their policy benchmark to a target range of 4.75% to 5%, up from almost zero a year earlier.
Forecasts last month showed the 18 officials expected rates to reach 5.1% by the end of the year, based on their median projection. Investors are betting the Fed will raise rates at its next meeting on May 2-3 but cut rates later this year, something officials haven’t forecast.
Williams said market expectations reflect recession forecasts as well as a steeper slowdown in inflation than most officials anticipate.
“We are seeing signs of a slowdown in inflation, but inflation is still very high,” he said. “Part of this inflation of basic services, excluding housing, which has not yet moved. So it still took us a bit of work to get inflation back to 2%.”
A series of bank collapses last month has added new uncertainty to the outlook for this year. Still, most Fed officials have continued to emphasize their commitment to lower prices.
Minneapolis Fed President Neel Kashkari, who is also voting on the policy this year, said last month that while it will take a while to see the full effects of the banking fallout, the Fed still has more work to do to reduce inflation. .
He spoke again Tuesday night, and while he did not comment directly on the policy outlook, he suggested that the worst of the banking stress was over.
“I’m not ready to declare an all-clear, but there are hopeful signs that these risks are now better understood and calm is being restored,” he said at a town hall event at Montana State University in Bozeman.
James Bullard, Kashkari’s counterpart in St. Louis, said measures taken to ease financial stress were working and the central bank should keep raising interest rates to combat high inflation. And Cleveland Fed chief Loretta Mester said policymakers will need to raise rates “a little more” and then keep them there for some time. Neither Mester nor Bullard are voting on monetary policy decisions this year.
‘Surprisingly strong’
Goolsbee said inflation and labor market data were “surprisingly strong” in late 2022 and early this year, but spillovers from the Silicon Valley Bank collapse in March and the resulting stress on the financial market may help the Fed. in its campaign to cool the economy.
“We have been tightening financial conditions to reduce inflation, so if the response to recent banking problems leads to financial tightening, monetary policy has to do less,” he said.
He was careful to say that the Fed should still prioritize its mission to reduce elevated price pressures.
Recent data suggests banks are pulling back on loans in the wake of turmoil in the banking sector, which has sent markets reeling and prompted federal regulators to step in to contain the panic.
More small American businesses reported having greater difficulty obtaining a loan in March, according to a survey by the National Federation of Independent Business. And US bank lending contracted to the highest recorded in the last two weeks of March, the Fed said last week.
Meanwhile, employers created 236,000 jobs in March and the unemployment rate fell to 3.5%, a sign that the labor market remains resilient despite the uncertain outlook.
New data will be released on Wednesday on consumer prices, which economists forecast rose 5.6% from a year earlier, excluding food and energy prices, virtually unchanged from the previous month.
Philadelphia Fed President Patrick Harker, who is also voting on the policy this year, repeated that he favors getting rates above 5% and then keeping them.
“If we see inflation not moving, I think we’ll have to do more,” he told an audience in Philadelphia on Tuesday. “But at this point, I don’t see why we would just keep going up, up, up and then oops! And then go down, down, down very fast. Let’s sit there.
(Updates with Kashkari’s comment in paragraph 14.)
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