© Reuters. FILE PHOTO: The Federal Reserve Building on Constitution Street in Washington, US on March 27, 2019. Photo: Brendan McDermid/Reuters
(Reuters) – Federal Reserve Governor Christopher Waller said on Monday that the Federal Reserve should raise interest rates by half a percentage point more than its next two meetings, stressing tensions at the central bank over how tight monetary policy it should be in the fight. be to discourage high inflation.
“I support a policy tightening of another 50 basis points for several meetings,” Waller said in a prepared speech at the Institute for Monetary and Financial Stability in Frankfurt, Germany. “Specifically, I’m not going to take 50 basis points off the table until I see inflation close to our 2% target.”
The Fed raised interest rates by half a percentage point earlier this month to a target range of 0.75% to 1% and plans to raise the same amount again at its next two meetings in June and July.
The debate at the Federal Reserve has shifted to the rate hike needed for the rest of the year. Most policymakers said they want to know how much inflation will fall over the summer before deciding whether to increase or decrease the size of the September rate hike.
However, one policymaker, Federal Reserve Bank of Atlanta President Rafael Bostic, said last week that he supported a “pause” at the September meeting to allow time to assess the impact of the Fed’s actions on the economy and inflation.
In contrast, St. Louis Fed President James Bullard said he wants the Fed to raise interest rates to 3.5% by the end of the year, which would mean a half-percentage point rise at all remaining Fed meetings.
Waller said he would like the central bank to raise interest rates above neutrality – the level that neither stimulates nor constrain economic growth – by the end of this year, but that he appears less aggressive than Pollard. Investors currently see the fed funds rate in a range of 2.50% to 2.75% by the end of the year, Waller said, noting that his plan to raise rates was not entirely different.
The Fed’s moves so far have been met with a sell-off in stocks and a rise in US Treasury yields and the dollar amid fears that its more aggressive stance could trigger a recession.
Fears of an economic slowdown have also been exacerbated by the Russian war in Ukraine, as well as China’s zero-to-COVID-19 policy, which has further entangled supply chains.
Waller said he is optimistic that a strong labor market can handle higher rates without a significant rise in unemployment, adding that he is prepared to respond more aggressively on interest rates if inflation remains elevated.
There are already signs that inflation has peaked. The Commerce Department reported Friday that in the 12 months through April, the PCE price index, the Fed’s preferred inflation indicator, rose 6.3% after rising 6.6% in March.
Alleged core PCE prices rose 4.9% year over year in April after rising 5.2% in March. This was the second consecutive month that the rate of increase reflected in the annual core PCE price index slowed.
But Waller was not affected by these readings. “Whatever measure is considered…the headline inflation has been above 4% for about a year and core inflation hasn’t fallen enough to meet the Fed’s target anytime soon.”