The Federal Reserve will need to raise rates to higher-than-expected levels to keep inflation from picking up if the recent strength in hiring and consumer spending continues, a central bank official said Thursday.
“I would be very pleased if the data we receive on inflation and the labor market this month shows signs of moderation,” Fed Governor Christopher Waller said in remarks posted on the website. from the Fed. “But wishful thinking is no substitute for hard evidence in the form of economic data. After seeing promising signs of progress, we cannot risk a pick-up in inflation.
Mr. Waller did not say in his prepared remarks whether he would continue to favor raising interest rates by a quarter of a percentage point, which was his preference at the last Fed meeting, or s would instead support a bigger half-point increase at its next rally on March 21-22.
The Fed’s rate-setting committee voted unanimously last month to slow rate hikes by raising their benchmark federal funds rate by a quarter of a percentage point – to a range between 4.5 % and 4.75% – after larger moves of half a point in December and 0.75 points in November.
At their December meeting, most Fed officials planned to raise the rate to between 5% and 5.5% this year to combat high inflation by slowing economic activity. So far, three out of 18 officials who participate in policymaking deliberations have suggested they would have favored a half-percentage-point increase at the recent meeting or might support such a move this month. this.
Since the recent meeting of Fed officials that ended Feb. 1, the government has released reports showing stronger-than-expected hiring and spending in January, as well as slower progress in reducing inflation. .
The jobless rate fell to 3.4% in January, a 53-year low, surprising economists who had long anticipated that Fed rate hikes would soon cool the economy. Economic growth has also rebounded in Europe, further easing fears of a global recession this year.
The decline in inflation at the end of last year came to a halt in January, and data revisions further indicated that the decline in recent months has not been as rapid as initially predicted. The 12-month inflation rate, excluding volatile food and energy items, was 4.7% in January, down from 4.6% in December, as measured by the Department of Trade.
Recent data shows consumer spending isn’t slowing as much as expected, the labor market “is still functioning unsustainably, and inflation isn’t falling as fast as I thought it would,” Waller said Thursday. . “It may be that progress has stalled, or it is possible that the figures released last month were an anomaly, possibly associated with unusually favorable weather conditions, and that future data will show that activity economy and inflation have resumed their decline.”
Waller said he wouldn’t see the need to change plans to raise the federal funds rate to between 5% and 5.5% this year if upcoming reports from the Labor Department show that growth in the employment slowed in February to levels at the end of last year and inflation reversed. its acceleration in January.
“On the other hand, if these data reports continue to be too hot, the policy target range will need to be even higher this year to ensure that we don’t lose the momentum that was in place before the release of the data. January data. ,” he said.
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Separately, Atlanta Fed President Raphael Bostic told reporters on Thursday that he was “still very strongly” in support of raising rates in quarter-point increments as officials determine how much rates should rise to restrict economic activity. “Slow and steady in that will be the proper course of action,” he said.
Bostic pointed to the lagged effect of past interest rate increases and said he expects them to become a more serious drag on activity this spring. “It’s only relatively recently that our politics has been (in) a formally restrictive space,” he said.
The Fed is raising rates to fight inflation by slowing the economy through tighter financial conditions — such as higher borrowing costs, lower stock prices and a stronger dollar — that dampen demand.
Stronger growth has led investors to drastically rethink the policy outlook for the year ahead. Investors in the interest rate futures markets now expect the Fed to hike the fed funds rate by a quarter point at each of its next three meetings, to about 5.4% by June, and see a 50% chance of another quarter-point increase in July, according to CME Group. They expect rates to end the year around these levels.
At the time of the last Fed meeting, from January 31 to February 31. 1, these investors expected the Fed to raise rates to 4.9% by March and then cut them toward the end of the year.
Write to Nick Timiraos at Nick.Timiraos@wsj.com
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