Top U.S. Fed officials prefer steady interest rate hikes over aggressive first move

Federal Reserve officials have suppressed growing market expectations for an aggressive initial response to US inflation at a 40-year high, signaling that steady interest rate hikes should be enough to do the trick.

“I don’t see any compelling case for taking a big step in the beginning,” New York Federal Reserve Chairman John Williams, the No. 2 head of the central bank’s policy-setting panel, told reporters. after a speech.

“I think we can steadily raise interest rates and reassess them,” he told the online event.

Fed Governor Lael Brainard – US President Joe Biden’s nominee for Fed Vice-Chair – said officials would likely begin a “series of rate hikes” at their next meeting in March, followed by decreases in the size of the Fed’s balance sheet “in upcoming meetings”.

Ms Brainard, speaking at a conference in New York, did not give a specific recommendation for the next meeting, but said recent changes in financial markets, including a rise in mortgage rates, were ” consistent” with the direction the Fed is taking.

“The market is clearly aligned with that and has advanced changes in funding conditions in a manner consistent with our communications and data,” she said.

Last week, investors in fed funds futures began to consider the idea that the Fed would raise rates by half a percentage point in March. Those expectations have now receded, with a quarter-point hike now forecast and six increases in total over the year.

In remarks at the New York conference, Chicago Fed President Charles Evans played down the idea that the Fed needed to get more aggressive, though he agreed the policy was “misguided. ” with annual increases in consumer prices exceeding 7%.

He said he remained confident that inflation would come down on its own.

“I consider that our current political situation probably requires fewer ultimate financial restraints than in past episodes and poses less risk,” Mr. Evans said at a separate event in New York.

“We don’t know what’s on the other side of the current inflation spike…we can again look to a situation where there’s nothing to worry about running the economy hot.”

The remarks came at the end of a tumultuous week in which traders huddled and then backed off, betting that the Fed would begin a series of rate hikes next month with a hike of half a point more. important than usual.

St Louis Fed President James Bullard had stoked those expectations by calling for raising rates a full percentage point by the Fed’s June meeting, a rate path that would require at least a hike. half a point by then.

Central bank policymakers have almost said they will start raising borrowing costs next month to rein in inflation that has topped their 2% target, and economists expect the Fed to launch the longest streak of rate hikes in decades.

I consider that our current political situation probably requires less ultimate financial restrictions than in past episodes and is less risky

Charles Evans, Chairman of the Chicago Federal Reserve

Fed Chairman Jerome Powell has not spoken publicly since January, so the comments from Mr. Williams and Ms. Brainard provide the best guidance yet on the mainstream opinion at the heart of Fed policy. the Fed.

Mr. Powell, however, will have a chance to shape expectations on March 2-3 when he presents his semi-annual monetary policy update to Congress in hearings announced Friday by the House Financial Services Committee and the Senate Banking Committee.

The Fed is expected to start raising rates next month and, once rate hikes get under way, start trimming its $9 trillion balance sheet “in a steady and predictable fashion,” Williams said. Both actions, he said, will better balance demand with supply.

At the same time, he said, other forces should also bring inflation down, with supply chains healing and consumers returning to pre-pandemic spending habits.

Mr. Williams said policymakers can speed up or slow down the pace of rate increases later, as needed. A trajectory in which the overnight federal funds rate moves into a range of 2% to 2.5% by the end of next year makes sense, he said.

Williams said he expects U.S. real GDP to grow just under 3% this year and the unemployment rate to fall to around 3.5% by the end of the year. ‘year. He expects inflation as measured by the personal consumption expenditure price index to fall to around 3% and to fall further next year as supply problems improve.

Updated: February 19, 2022, 12:40 p.m.

Stephen V. Lee