Several officials from the Federal Reserve expressed the need for additional interest rate hikes to combat persistently high inflation, although the end of the current monetary policy tightening cycle appears to be near. Since March 2022, the Fed has already raised interest rates by 5 percentage points in order to address the highest levels of inflation the United States has seen in four decades. The decision last month to hold off on a rate increase was made to allow for a thorough assessment of the impact of previous rate hikes, but most officials still expect at least two more increases by the end of 2023.
San Francisco Fed President Mary Daly stated that a couple more rate hikes will likely be necessary throughout the year to effectively control inflation and meet the central bank’s 2 percent target. However, Daly also acknowledged that the risk of doing too little is diminishing as the Fed approaches the final stage of its rate hike cycle. She emphasized the importance of data-dependence in determining the appropriate course of action.
It is widely anticipated that the Fed will announce a rate hike at its upcoming meeting, which would bring the policy rate to a range of 5.25 percent to 5.50 percent. The timing of future rate increases is less certain, with possibilities including a hike in September, waiting until November, or maintaining the current rate to allow inflation to ease gradually.
The New York Fed’s recent survey on consumer expectations in June revealed a decline in near-term inflation expectations, indicating a potential weakening of price pressures. This could alleviate some of the pressure on the central bank to further increase rates. However, the survey also highlighted continued expected gains in home prices, suggesting that housing inflation could once again become an issue for the Fed.
Different views exist within the Fed regarding the approach to rates. Atlanta Fed President Raphael Bostic believes a patient approach and reliance on restrictive policies will be effective in reducing inflation without requiring additional action from the central bank. On the other hand, Cleveland Fed President Loretta Mester expressed her preference for rate increases and acknowledged the importance of aligning with market expectations. She emphasized the need for higher rates due to the economy’s underlying strength and persistent high inflation.
In conclusion, while the Federal Reserve recognizes the need for additional rate hikes to combat inflation, the end of the current tightening cycle is drawing near. The central bank remains cautious and closely monitors data to determine the appropriate path forward.
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