The Fed could raise interest rates to half a percentage point if inflation remains stubbornly high, a leading US Federal Reserve official said.
Raphael Bostic, president of the Fed’s branch in Atlanta, stuck to his demand for three-quarter-point rate hikes in 2022, the first of which came in March in an interview with the Financial Times. But he said a more aggressive approach was possible if the economic data warranted it.
That could mean rate hikes at each of the seven remaining policy meetings in 2022, or even the possibility of the Fed raising the federal funds rate by half a percentage point, double its typical amount, and a tool it has not used in about two decades. .
“Every opportunity is on the table for every meeting,” Bostic said Friday. “If the data say that things have evolved in such a way that a movement of 50 basis points is required or [would] be appropriate, then I will lean into it. . . If it makes sense to move on to consecutive meetings, I will be comfortable with that.
“I think there’s a perception that we’re having some meetings that we’re really just calling in and that there’s no power of action, and that’s just never been my mindset.”
He added that he would keep an eye out for a slowdown in monthly consumer price increases and further evidence that rising wages do not make sense for higher inflation when he thinks about his forecast for interest rates. He said he was encouraged by the latest Employment Cost Index (ECI) report, which was released on Friday and tracks wages and benefits paid by U.S. employers, and expects a moderation in wage growth going forward.
Bostic’s comments repeat those of Jay Powell, the central bank’s chairman, who this week refused to rule out even the most forceful political reactions to curb inflation, which is running at the fastest pace in about 40 years.
Powell said instead that the Fed would be “humble and quick” as it appears to be “moving steadily away from” the ultralight monetary policy it introduced in early 2020 to protect the economy from the Covid-19 shock .
Market expectations have changed as a result, with traders now pricing an interest rate increase of a quarter point more this year, a total of five.
The Fed’s embrace of a much more hawkish stance has rattled global financial markets, leading to extreme volatility this month and huge losses for US equities.
The Atlanta Fed chief expressed little concern about the recent fluctuations, saying it was a natural reaction to a Fed starting to withdraw its support.
“The reduction in housing should translate into tighter financial markets,” Bostic said. “The developments we have seen on that front are comforting in the sense that markets are still functioning as they should and they are responding to conditions in ways that are rational and appropriate.”
However, he said he closely monitored lending markets overnight, especially for signs of stress similar to the 2018 episode where the financial markets took hold as the Fed tightened monetary policy further despite fears of a slowdown in growth.
Bostic, who also supports the Fed reducing its $ 9tn balance sheet “as soon as possible without compromising market function, said he was” optimistic “about how the economy would fare in the coming months, despite high inflation.
He also denied allegations that the Fed would raise interest rates too aggressively and in a way that would prove detrimental.
“Our political path is not a narrowing path. It is a less accommodating road, ”he said. “If we do the three [interest rate increases] as I have in mind, it will still leave our policy in a very welcoming space.
“I do not think there will be much constraint on growth when we remove these emergency measures.”