Top Fed officials say U.S. interest rates will keep rising until high inflation subsides
Two senior Federal Reserve officials said on Tuesday the U.S. central bank needed to raise interest rates much higher and likely keep them high for some time to contain the worst inflation spike in nearly 41 years.
The Fed is “far from over” in its fight against inflation, San Francisco Federal Reserve Chair Mary Daly said in an interview with CNBC.
The central bank will raise rates as much as necessary, she said, to bring down high inflation. The cost of living jumped at an annual rate of 9.1% in June, from less than 2% about two years ago.
“Americans need to know that they don’t have to worry about inflation when they wake up in the morning,” she said.
Chicago Fed President Charles Evans, for his part, said he hoped the Fed could raise rates at a slower pace later in the year. Still, that would depend on whether inflation slows, he and Daly said.
Evans said he was still open to a rate hike of 0.5 to 0.75 percentage points in September, with potentially quarter-point lower hikes thereafter. Daly did not offer specific predictions.
Evans predicted that the central bank’s benchmark federal funds rate would reach around 3.75% to 4% by next year.
Neither Daly nor Evans are voting members of the bank’s interest rate setting committee in 2022. Both have generally been viewed as “doves” of inflation, so their harsh words suggest other members Fed voters will likely remain aggressive.
At the end of July, the Fed raised its short-term interest rates to a range of 2.25% to 2.5% and it is expected to raise them again in September.
Early next year, the central bank announced its intention to raise the so-called federal funds rate to 3.8%.
Higher rates generally slow the economy by increasing the cost of borrowing for businesses and consumers. They tend to invest less and buy fewer expensive items such as cars and houses.
A big concern, however, is that higher rates could plunge the United States into the second recession in three years. Many economists believe a slowdown is likely by 2023 if the Fed is to raise rates to 4% or more.
Daly and Evans don’t think a recession is inevitable, but they said it’s a risk the Fed must accept to reduce inflation. And if economic data starts showing a sharp drop in inflation, the Fed could adjust policy if necessary.
Still, Daly said the Fed would do the right thing.
She said it was a “riddle to me” that financial markets seem to expect the Fed to stop raising interest rates – and even start lowering them – if the economy headed downhill. recession.
“It’s terribly difficult for the economy to raise rates quickly and then lower them quickly,” Daly said.
The central bank kept its short-term federal funds rate near zero throughout the pandemic until March in an easy money strategy to support the economy. Yet critics say the Fed has been too lax for too long and has contributed to soaring inflation.
The Fed has rarely succeeded in reducing such high episodes of high inflation without causing a recession.