Fed official supports 0.75 percentage point rate rise in July

A top US Federal Reserve official expressed early support for another 0.75 percentage point interest rate rise at the central bank’s next meeting in July, in anticipation that inflation will not moderate sufficiently to slow the pace of monetary tightening.

In a remarks delivered on Saturday, Christopher Waller, a Fed governor, affirmed the central bank’s commitment to tackling the worst inflation problem in more than forty years, saying it was “all in on re-establishing price stability”.

Waller’s comments come just days after the Fed significantly stepped up its efforts to tackle soaring prices and implemented the first 0.75 percentage point rate rise since 1994. The Swiss National Bank and Bank of England also raised interest rates this week, as the world’s central banks took aggressive action to stamp out surging inflation.

“If the data comes in as I expect I will support a similar-sized move at our July meeting,” Waller said on a panel hosted by the Fed’s Dallas branch, characterising this week’s decision as “another significant step toward achieving our inflation objective”.

In addition to raising the federal funds rate to a new target range of 1.50 to 1.75 per cent, the US central bank also signalled support for what looks set to be the fastest monetary tightening since the 1980s.

Most officials now expect the policy rate to rise well above 3 per cent by the end of the year and potentially notch as high as 3.8 per cent in 2023.

Reflecting that this rapid rise in borrowing costs is likely to cause some economic pain, policymakers projected the unemployment rate rising over the next two years from its current 3.6 per cent level to 4.1 per cent in 2024, with core inflation still just above its 2 per cent target. Rate cuts are also expected by then, as growth is projected to slow below 2 per cent.

Many economists believe that the economic fallout from the Fed’s actions to tame inflation — which they anticipate could get worse in coming months and be more persistent than expected — will be far greater than what the central bank has so far acknowledged. That means higher unemployment and increased odds of a recession next year, they warned.

While Jay Powell, the chair, conceded this week that it is becoming “more challenging” to achieve a so-called “soft landing”, he maintains there are still paths to cool the economy to the point where inflation moderates but without causing undue economic harm.

The Fed has faced substantial criticism for contributing in part to this problem by moving too slowly last year to tackle inflation and treating it instead as a “transitory” phenomenon that would work itself out organically. By allowing price pressures to get out of hand, the Fed now must act much more aggressively than otherwise would have been the case, its detractors say, putting the economic recovery at risk.

Waller on Saturday addressed these judgments, admitting that some of the criteria the Fed had put in place before it began scaling back its monetary stimulus were too “restrictive”. Instead of reducing monetary accommodation “later and faster”, Waller said the Fed may have been able to do so “sooner and gradually”.

The central bank is now poised to continue tightening the screws of its monetary policy in forceful fashion, with Powell indicating it will maintain an aggressive pace until officials see “compelling evidence” that inflation is moderating. That entails a series of decelerating monthly inflation numbers.

For its next meeting in July, the chair said the Fed would probably choose between a 0.50 or 0.75 percentage point increase, but some economists believe an even bigger move of a full percentage point is not completely off the table.

Neel Kashkari, the dovish president of the Minneapolis Fed, on Friday said he could support another 0.75 percentage point move next month, but cautioned the central bank against doing “too much more front-loading”.

He said a “prudent strategy” may be continuing with half-point rate rises after the July meeting “until inflation is well on its way down to 2 per cent”.