Top officials say Fed rate hikes have ‘a ways to go’

Federal Reserve Governor Christopher Waller added his voice on Friday to the chorus of central bank officials who favor a slowdown in interest rate increases at the Feb. 1 central bank meeting. This is likely to anchor market expectations of a return to smaller policy adjustments after a series of massive interest rate moves.

Mr. Waller spoke on the eve of the central bank’s lull before its meeting, which means investors won’t hear any further comment from Fed officials before they make their decision on interest rates. His comments were consistent What many colleagues Many publicly support slowing rate increases at the meeting, he said, and he did not rule out senior policymakers who are yet to make up their minds.

Central bankers quickly raised interest rates in 2022, raising borrowing costs in three-quarters-point increments for most of the year, before slowing to half a point in December. But they are entering a new phase that focuses more on how high interest rates can go and less on how quickly they can be reached. The idea is that rates are now high enough to slow the economy appreciably, and that adjusting them incrementally will give policymakers time to see how their policy works.

That prompted policymakers toward a quarter-point increase, also known as a 25 basis point increase, which was common before the pandemic.

“After the sharp rally and the use of monetary policy to dramatically raise interest rates across the economy, it was clear to me that it was time to slow the rate of climb, but not stop it,” Mr. Waller said of the downward turn in December. “It looks like there’s a little bit of turbulence ahead, so I currently favor a 25 basis point increase” at the next Fed meeting, he said.

But Mr Waller joined his colleagues in stressing that rates still need to rise to ensure inflation is back under control.

John C. Williams, President of the Federal Reserve Bank of New York, said Thursday that the central bank has more to do in its effort to slow the economy.

While Mr. Williams A The recent slowdown in inflation He said nothing to quash expectations in financial markets that the Fed might slow interest rate increases at its next meeting, and emphasized that the economy remains unbalanced.

“It will take time for supply and demand to return to the proper alignment and balance, so we have to keep moving,” Mr. Williams said at an event in New York. He later added that there were “a ways to go” before prices were high enough.

“Obviously some readings on inflation have been encouraging,” Williams said, but noted that the job market remained strong. “If anything, it has somewhat raised my expectations for growth.”

Mr. Williams said that would affect how high interest rates are needed to be constrained enough to bring inflation back to the Fed’s target.

“It seems to me that demand is still very strong relative to available supply,” he said, and the “concern” is that this will continue to put pressure on inflation.

Several Fed officials have suggested that interest rates should rise above 5 percent, which is what they were expecting when they issued their latest economic forecasts in December. Based on market prices, investors expect policymakers to stop earlier than that, though: They see prices rise from their current range of 4.25 to 4.5 percent to a peak of 4.75 to 5 percent before falling again by the end of the year.

While the Fed officials have Cooling welcomed In the price increases, they also reiterated their commitment to lower inflation and their judgment that the problem is not yet under control.

“We don’t want to be fake,” Mr. Waller said Friday. “I will look for a continuation of the recent improvement in headline and core inflation.”

Inflation has been a global problem, and other leading economists and central bankers from around the world have expressed similar concerns about its potential force, including during panel sessions this week at the World Economic Forum in Davos, Switzerland. Thomas Jordan, President of the Swiss Central Bank, Caution on Friday It may be difficult to bring inflation back to normal.

“It will be much more difficult to get inflation from 4 percent to 2 percent,” Jordan said. Many central banks, including the Federal Reserve, target 2% annual inflation.

It’s surprising that markets have been so single-minded about the way interest rates will be shaped, said Lawrence H. Summers, a Harvard economist and former Treasury secretary, on the same panel in Davos.

“I can see many, many more scenarios where prices end higher than the current price than I can see scenarios where prices end lower than the current price,” he said. “So, I’m a little surprised at the market’s expectations of what’s going to happen.”