Fed Officials Back More Half-Point—or Higher—Hikes

Federal Reserve officials reinforced Chair Jerome Powell’s message that half-point interest rate increases are on the table in June and July, but a larger move of 75 basis points (bps) could be warranted later in the year.

“We don’t rule out 75 forever,” Cleveland Fed President Loretta Mester said in an interview Tuesday on Bloomberg Television with Michael McKee. “When we get to that point in the second half of the year, if we don’t have inflation moving down, we may have to speed up.”

Stocks retreated on her remarks to Bloomberg, with the S&P 500 erasing its advance after climbing almost 2 percent.

The Fed raised rates by a half point last week, marking the largest single hike since 2000, and Powell said similar moves were on the table for the next two meetings. Officials also announced they would start shrinking their $9 trillion balance sheet from June 1 at a pace that will step up quickly to $95 billion a month.

Mester earlier told Yahoo! Finance that raising rates by a half point at the next two meetings of the U.S. central bank “makes perfect sense” as officials battle surging inflation. That echoed New York Fed President John Williams, who also noted that the Fed would be shrinking its balance sheet at the same time.

“That means that we are actually removing accommodation pretty quickly through that channel. And that gives us a little space to move in something like a 50 basis point increment at the next couple of meetings,” he told reporters in Eltville, Germany.

“As we watch the data over the remainder of the year, we’re going to have to adjust course and take the policy actions that are appropriate,” added Williams, a member of Powell’s leadership team.

Financial markets have swung violently as investors bet on the U.S. central bank’s ability to cool the hottest inflation in 40 years without crashing the economy.

Policymakers have voiced optimism they can ease price pressures without triggering a recession, though Williams said a “soft landing” may lead to somewhat higher unemployment than the 3.6 percent reported in April.

“When I think of a ‘soft landing,’ it’s really a matter of ‘Yes, we could see growth below trend for a while, and we definitely could see unemployment moving up somewhat, but not in a huge way,’” Williams said. “I would not define a soft landing as unemployment staying at 3.6 percent. I would define it as really maintaining a healthy, strong labor market while inflation is coming down.”

Still, critics say the Fed has been to slow to act against inflation. They also slam the chair’s decision to declare officials weren’t considering a larger 75 bps increase—which had been floated as an option by Fed hawk James Bullard of St. Louis—as a mistake.

The Fed’s preferred inflation measure rose 6.6 percent in March, and Russia’s invasion of Ukraine—along with another round of virus lockdowns in China—could keep prices firm. Powell, in his press conference last week, said the Fed can slow demand but added that it doesn’t have the tools to improve supply.

“That will be a challenge, no doubt, because there are a lot of things affecting inflation now on the supply side that are not really affected by monetary policy,” said Mester. “But we’re really committed to doing what we need to do with our policy tools to get demand better aligned with that constrained supply.”

Officials say they want to raise rates to the so-called neutral level that neither speeds up nor slows down the economy, which they estimate lies between 2 percent and 3 percent, and then assess whether they need to go further.

“I don’t care what the reasons are; inflation’s too high, and it’s my job to get it down,” Fed Governor Christopher Waller told the Economic Club of Minnesota, who said the Fed was raising rates to cool demand. “We have a labor market that’s so hot, so overstimulated, that it’s a market where you can pull back a lot of demand for labor, and it would actually be a good thing.”

On the other hand, Waller said, “this is not a shock-and-awe Volcker moment,” referring to the dramatic action taken by then–Fed Chair Paul Volcker to defeat runaway inflation in the 1980s.

Richmond Fed President Thomas Barkin, echoing the determination of his colleagues to cool prices, said they can avoid the economic pain that the central bank inflicted back then. “You might ask if this path requires a Volcker-like recession. Not necessarily. At 83 basis points, we are still far from the level of interest rates that constrains the economy,” he told the Cecil County Chamber of Commerce in Maryland.

“Once we get in the range of the neutral rate, we can then determine whether inflation remains at a level that requires us to put the brakes on the economy or not,” he said.

—With assistance from Craig Torres.

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