Written by Anne Safir and Howard Schneider
NEW ORLEANS (Reuters) – Debate over whether U.S. interest rates are high enough deepened this week among Federal Reserve officials, with a major survey showing rising consumer inflation expectations. This may lead to further debate.
Dallas Fed President Rory said: “There are significant upside risks to inflation, and we are not sure how restrictive policy will be enough to bring inflation back to the central bank’s 2% goal.” I think there is some uncertainty as to whether that is the case.” Logan spoke at the Louisiana Bankers Association conference in New Orleans.
“I think it’s premature to think about cutting rates. … I think we need to see some of these uncertainties resolved in terms of the path we take, and we remain very flexible,” Logan said. There is a need.” The Fed did not directly say whether it felt the need to raise its benchmark interest rate again from the 5.25% to 5.50% range it has held since July.
Many U.S. central bank officials, including Fed Chair Jerome Powell, have said they still think further rate hikes are unnecessary.
Atlanta Fed President Rafael Bostic said in an interview with Reuters that it remains likely that current monetary policy will slow inflation and allow the central bank to start lowering interest rates in 2024. (Probably only a quarter point reduction and not until the last few months of the year.
Bostic said in an interview Thursday that “it’s going to take a while” for inflation to come down steadily, but “I still hold that view.”
However, after three months of no improvement in inflation, the outlook remains fluid.
Friday’s data was yet another shock in the wrong direction. Last year’s inflation expectations, according to the University of Michigan Consumer Sentiment Survey, rose to 3.5% from 3.2% in May, the highest level since November, and long-term expectations rose as well.
A one-month reversal may not be all that significant, but if it continues it will put a question mark on the Fed’s current assessment that expectations are “fixed” and that interest rates will be high enough to end the war on inflation. This would further strengthen the argument made by Mr. Logan and some others that it may not be as high as it should be.
Fed officials believe that anchored expectations are an important sign of their credibility and could help bring inflation back to 2%.
Chicago Fed President Austan Goolsby, speaking at the Minnesota Economic Club, said rising inflation expectations were a “terrible harbinger” of more inflation, but he was not concerned about the immediate outcome.
“There’s not much evidence that inflation is stalling,” Goolsby said, adding that current policy is “relatively restrictive.”
The University of Michigan data was made public after Logan began speaking, but he did not mention it.
The survey also showed a sharp decline in overall consumer sentiment, which could signal a decline in consumer spending in coming months, even as households expect higher inflation. , giving a confusing signal.
“The Fed is walking a tightrope as it balances its mission of price stability and growth,” said Jeffrey Roach, chief economist at LPL Financial. “While this is not our base case, we see an increased risk of stagflation, with growth slowing and prices still rising.”
The Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditure Price Index, rose at an annual rate of 2.7% in March, but there has been little progress in the first three months of the year.
“It raises questions.”
In an essay published earlier this week, Minneapolis Fed President Neel Kashkari also raised the possibility that interest rates may not be restrictive enough given the continued strength of the U.S. economy, particularly the housing market.
“It is difficult to explain the continued strong economic activity,” Kashkari said. “It raises questions about how restrictive the policy really is.”
By contrast, San Francisco Fed President Mary Daly said in a recorded interview Thursday that the U.S. “neutral” interest rate may have risen slightly, adding that any level of the benchmark policy rate would depend on the economy. suggested that it was low. Your activity will be better than it would otherwise be.
But he said the Fed’s solution in that case would be to keep interest rates at current levels for an extended period of time.
Even if the neutral rate were higher, “we would still have restrictive policy, and that’s what we want,” Daly said. “But it may take longer to bring inflation under control.”
(Reporting by Ann Safir in New Orleans and Howard Schneider in Washington; Editing by Paul Simao and Chizu Nomiyama)
