Federal Reserve officials pushed back Friday against the prospect that they would begin raising interest rates next month with a larger half-percentage-point increase in their benchmark rate.
Recent data pointing to stronger hiring, consumer spending and inflationary pressures had prompted investors in bond and interest-rate futures markets to place growing probabilities on a larger rate increase at the Fed’s next meeting, on March 15-16. The Fed typically raises rates in smaller, quarter-percentage-point increments and hasn’t made a larger increase since 2000.
New York Fed President John Williams, who is one of the most senior advisers to Chairman Jerome Powell and helps shape the policy agenda, hinted that the Fed wouldn’t need to begin what is expected to be a series of interest rate increases with the more aggressive, half-point move.
“There’s really no kind of compelling argument that you have to be faster right in the beginning” with rate increases, Mr. Williams told reporters on Friday. “There’s no need to do something ‘extra’ at the beginning of the process of liftoff. We can…steadily move up interest rates and reassess. I don’t feel a need that we’d have to move really fast at the beginning.”
Instead, Mr. Williams and several of his colleagues in recent days have suggested the Fed could raise rates in more measured, quarter-point increments unless inflation doesn’t diminish later this year as forecasters expect.
The second member of Mr. Powell’s policy-making inner circle, Fed governor Lael Brainard, said Friday, “given that we have seen quite strong data, I do anticipate that it will be appropriate at our next meeting…to initiate a series of rate increases.” Ms. Brainard has been nominated by President Biden to serve as the Fed’s vice chairwoman and is awaiting Senate confirmation.
Officials must balance whether larger, upfront rate increases risk fueling market expectations for even bigger and potentially more disruptive moves or whether it would give them greater flexibility to slow rate increases later this year if inflation declines.
Fed officials face a separate calculus over how and when to begin shrinking their $9 trillion asset portfolio later this year and over how to telegraph their sequence of rate increases at their March meeting, when they will prepare new economic and interest-rate projections.
Minutes from the Fed’s Jan. 25-26 meeting indicated Fed officials were satisfied last month with how financial markets had interpreted their recent signaling around coming rate increases.
Since that meeting, markets have anticipated several additional rate increases, and a range of other borrowing instruments have begun to reflect those expectations of higher borrowing costs, though the Fed’s benchmark rate remains near zero.
For example, the average rate for a 30-year fixed-rate mortgage rose to 3.92% for the week that ended Thursday, according to Freddie Mac, putting it at its highest level since May 2019. Other measures of longer-term corporate borrowing costs have also begun to reflect somewhat higher yields.
Ms. Brainard suggested that because markets are properly understanding the Fed’s anticipated rate increases and plans to shrink its asset portfolio, the Fed’s communications about tighter policy were already having an effect to withdraw stimulus. Her comments implicitly pushed back against expectations of a larger rate rise.
“We’ve already seen the kinds of tightening in the financial conditions facing many households and businesses that is consistent with the forward-looking nature of markets,” she said during a panel discussion at a policy conference in New York. “The market has brought forward the changes” in financing costs that will result from anticipated rate increases, she said.
The debate over how much to raise interest rates still has weeks to play out before the Fed’s next meeting. Officials will receive additional reports on February hiring and inflation before that meeting. They must also evaluate the potential for a Russian invasion of Ukraine, which could weaken global growth while aggravating inflation by roiling energy markets.
Heightened geopolitical tensions due to a war in Eastern Europe could weaken the case for a larger rate increase in March.
On Thursday, Cleveland Fed President Loretta Mester said it would be appropriate to continue raising interest rates after an initial increase in March and that the Fed could consider large moves in the second half of the year, “if by midyear I assess that inflation is not going to moderate as expected.”
A fourth Fed official didn’t directly address the exact sequence of rate moves on Friday but laid out a case in which the Fed might refrain from raising rates over the next year to a level that is designed to explicitly restrict hiring and growth to put downward pressure on inflation.
“The current stance of monetary policy is wrong-footed and needs substantial adjustment,” said Chicago Fed President Charles Evans, also speaking at the New York conference. “But how big will [that adjustment] need to be?”
Mr. Evans said that one model of inflation presumes that price pressures should diminish this year if they are due to what he calls “markup shocks” driven by the pandemic that are relatively short-lived. It would be more troubling, he said, if higher inflation was resulting from what he described as persistent technological disruptions.
If inflation data this year suggest the economy is being buffeted by these technological disruptions, that would lead to higher inflation and provide support for a stronger Fed response, he said.
“As we move through the year, we should gain more evidence on the sources of persistence and the sources of improvement in the inflation outlook,” said Mr. Evans, who spoke on a panel at a conference hosted by the University of Chicago’s Booth School of Business.
St. Louis Fed President Jim Bullard has hinted at the need for a larger move this spring, though he has said he would defer to Mr. Powell in determining whether to lead off with such a move. “The best response to this situation is to front-load the removal of accommodation,” Mr. Bullard said on Thursday.
Expectations of a larger March rate increase ratcheted higher twice this month—first when the Labor Department reported on Feb. 10 that consumer prices rose in January by a somewhat larger margin than economists had anticipated, and later when Mr. Bullard said the stronger inflation data would justify the greater rate increase.
That inflation report showed consumer prices in January rose 7.5% from a year earlier, reaching a new 40-year high. Elevated inflation has been primarily driven by brisk demand for goods, shipping bottlenecks and shortages for intermediate goods such as semiconductors, but prices in January firmed up in the service sector.
Interest-rate futures markets showed investors judged a nearly 20% probability of a larger rate increase next month, down from 50% one week ago, according to CME Group.
Kansas City Fed President Esther George, in an interview on Feb. 11, said it was too soon to determine whether a half-percentage-point increase would be warranted. “What I am comfortable saying is, it’s going to take a series of rate increases and seeing how the economy responds…to really get a good gauge on what’s going to be required of us,” she said.
Via: The Wall Street Journal, Nick Timiraos
