Fed Officials Signal Return to Bigger Interest-Rate Hikes
By Two Federal Reserve officials, Loretta Mester of the Cleveland Fed and James Bullard of the St. Louis Fed, signaled they may favor returning to bigger interest-rate hikes in the future. Both officials noted they saw the case for raising rates by a half-point at the central bank’s meeting earlier this month.
Mester said she saw a “compelling economic case” for a 50 basis-point interest-rate hike at the Fed’s Jan. 31-Feb.[0] 1 meeting.[1] She also noted that given the risks and costs, the Fed needs to be prepared to move the federal funds rate higher if the upside risks to inflation are realized and inflation fails to moderate as expected, or if the imbalances between demand and supply in product and labor markets persist longer than anticipated.
Bullard similarly noted that inflation “remains too high” but noted that it has come down recently, signaling that a “disinflationary” process had begun and could continue with additional Fed rate increases.[2]
In December, officials estimated that the maximum interest rate for the year would be 5.1%, according to the average prediction, signifying two additional quarter-point increments.[0] On Tuesday, multiple policymakers suggested that interest rates may have to be raised more than expected in order to keep inflation under control.
Mester commented that she predicts economic growth to be “well below trend” this year, while not anticipating a recession to be in the outlook for 2023.[3] She also said she doesn’t think it is wise to surprise the markets.[4]
As Wall Street gears up for key inflation data, Wells Fargo Securities’ Michael Schumacher warned investors that the Fed is not their friend.[5] He noted that higher yields don’t sound good for stocks, and he added that he thinks market optimism will ultimately fade.[5]
The Fed is clearly looking for ways to ensure inflation remains low and steady, and policymakers have indicated they may be open to larger rate hikes if necessary. Investors should keep a close eye on the upcoming inflation data in order to gauge the direction of the Fed’s policy going forward.[6]
0. “Fed's Mester Says She Saw ‘Compelling' Case for Half-Point Rate Hike” Regina Leader Post, 16 Feb. 2023, https://leaderpost.com/pmn/business-pmn/feds-mester-says-she-saw-compelling-case-for-half-point-rate-hike
1. “Fed Hawks See Possible Case for Returning to Larger Rate Hikes” Yahoo Finance, 16 Feb. 2023, https://finance.yahoo.com/news/fed-officials-support-more-rate-184756819.html
2. “Forexlive Americas FX news wrap: Bullard finally cracks the market's resolve” ForexLive, 16 Feb. 2023, https://www.forexlive.com/news/forexlive-americas-fx-news-wrap-bullard-finally-cracks-the-markets-resolve-20230216
3. “Fed's Mester saw ‘compelling' case for 0.50% rate hike this month” Yahoo Money, 16 Feb. 2023, https://money.yahoo.com/feds-mester-saw-compelling-case-for-050-rate-hike-this-month-135749680.html
4. “Fed's Mester: Not ready to say if Fed needs bigger hike at next meeting” FXStreet, 16 Feb. 2023, https://www.fxstreet.com/news/feds-mester-not-ready-to-say-if-fed-needs-bigger-hike-at-next-meeting-202302161541
5. “‘Fed is not your friend': Wells Fargo delivers warning ahead of key inflation report” msnNOW, 14 Feb. 2023, https://www.msn.com/en-us/money/markets/fed-is-not-your-friend-wells-fargo-delivers-warning-ahead-of-key-inflation-report/ar-AA17roXy
6. “Fed governor estimates additional rate rises to battle infla…” MENAFN.COM, 14 Feb. 2023, https://menafn.com/1105569913/Fed-governor-estimates-additional-rate-rises-to-battle-inflation
