FRANKFURT: The U.S. Federal Reserve should be prepared to raise interest rates by a half percentage point at every meeting from now on until inflation is decisively curbed, Fed Governor Christopher Waller said on Monday, underscoring tensions at the central bank about how aggressively to tighten policy as it battles to bring down high inflation.
“I am advocating 50 (basis point hikes) on the table everymeeting until we see substantial reductions in inflation. Untilwe get that, I don’t see the point of stopping,” Waller saidfollowing a speech to the Institute for Monetary and FinancialStability in Frankfurt, Germany, having earlier confirmed hewants that size of rate hike at the next “several” meetings.
Waller’s comments came ahead of a meeting on Tuesday between Fed Chair Jerome Powell and U.S. President Joe Biden for a discussion called by the White House on state of the American and global economy.
The Fed is under pressure to decisively make a dent in aninflation rate that is running more than three times its 2% goaland has caused a jump in the cost of living for Americans.
It faces a difficult task in dampening demand in the economy enough to curb inflation while not causing a recession.
Biden’s public approval rating fell this week to 36%, thelowest level of his presidency, as Americans suffered from high inflation, according to a Reuters/Ipsos opinion poll last week, raising alarms that his Democratic Party is on track to lose control of at least one chamber of Congress in the Nov. 8midterm election.
Fed policymakers raised the benchmark policy rate by half apercentage point earlier this month, to a target range ofbetween 0.75% and 1%, and plans further increases of the same size at its next two meetings in June and July.
Debate at the Fed has shifted to the interest rate hikesrequired for the remainder of the year.
Fed officials stress ‘determination’ to bring down inflation
Most policymakers have said they want to wait and see how much inflation comes down over the summer before deciding whether they need to increase or reduce the size of an interest rate hike in September.
One policymaker though, Atlanta Fed President RaphaelBostic, said last week that he was in favor of a “pause” at theSeptember meeting to allow time to assess the impact of theFed’s moves on the economy and inflation.
By contrast, St. Louis Fed President James Bullard has saidhe wants the Fed to hike rates to 3.5% by year’s end, whichwould involve half percentage-point increases at all the Fed’sremaining meetings.
Waller, on the hawkish wing like Bullard, said he wants tosee the central bank raising its policy rate above neutral - thelevel that neither stimulates nor constrains economic growth -by year end.
The neutral rate is seen around 2.5%, according to the median of Fed policymaker estimates made at the March meeting.
Investors currently see the federal funds rate in a rangebetween 2.50% and 2.75% at the end of this year.
Employment can stay strong
The Fed’s actions so far have been met with an equitiessell-off and surge in U.S. Treasury yields and the dollar.
Fears of an economic downturn have also been exacerbated by Russia’s war in Ukraine as well as China’s zero COVID-19 policy, which have further entangled supply chains.
Waller said he is optimistic the strong labor market canhandle higher rates without a significant increase inunemployment.
“If we can get unemployment to just 4.25%, I would considerthat a masterful performance,” Waller said. The unemployment rate is currently 3.6%.
There are already signs inflation has peaked. In the 12months through April, the personal consumption expenditures (PCE) price index, the Fed’s preferred gauge of inflation, advanced 6.3% after jumping 6.6% in March, the Commerce Department reported on Friday.
So-called core PCE prices increased 4.9% year-on-year inApril after rising 5.2% in March. It was the second straightmonth that the rate of increase reflected in the annual core PCE price index decelerated.
But Waller remained unmoved by those readings. “No matterwhich measure is considered…headline inflation has come inabove 4% for about a year and core inflation is not coming down enough to meet the Fed’s target anytime soon.”