Fed official backs July rate hike of 0.75 percentage points

A senior US Federal Reserve official expressed early support for another 0.75 percentage point interest rate hike at the central bank’s next meeting in July, anticipating that inflation will not moderate. enough to slow the pace of monetary tightening.

In remarks on Saturday, Fed Governor Christopher Waller affirmed the central bank’s commitment to tackling the worst inflation problem in over forty years, saying it was “fully prepared to restore price stability.

Waller’s comments come just days after the Fed dramatically stepped up its efforts to fight soaring prices and implemented the first rate hike of 0.75 percentage points since 1994. The Swiss National Bank and Bank England also hiked interest rates this week as central banks around the world took aggressive action to stamp out runaway inflation.

“If the data comes in as I expect, I will support a similar sized move at our July meeting,” Waller said at a panel hosted by the Fed’s Dallas branch, calling the decision this week as “another important step towards achieving our inflation target”. .

Along with raising the federal funds rate to a new target range of 1.50-1.75%, the U.S. central bank also signaled support for what appears to be the fastest monetary tightening since the 1980s.

Most officials now expect the policy rate to be well above 3% by the end of the year and potentially reach 3.8% in 2023.

Given that this rapid increase in borrowing costs is likely to cause economic hardship, policymakers have projected that the unemployment rate will rise over the next two years from its current level of 3.6% to 4.1%. % in 2024, with core inflation remaining just above 2%. cents goal. Rate cuts are also expected by then as growth is expected to slow below 2%.

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Many economists believe that the economic fallout from the Fed’s actions to control inflation – which they say could worsen in the coming months and be more persistent than expected – will be far greater than the central bank has so far acknowledged. That means higher unemployment and an increased likelihood of a recession next year, they warned.

While Jay Powell, the chairman, conceded this week that it was becoming “more difficult” to achieve a so-called “soft landing”, he maintains that there are still avenues to cool the economy to the point where the inflation is moderating but without causing undue economic problems. harm.

The Fed has faced widespread criticism for contributing in part to this problem by moving too slowly to fight inflation last year and instead treating it as a “transitional” phenomenon that would resolve itself. organically. By allowing price pressures to spiral out of control, the Fed must now act far more aggressively than it would have otherwise, critics say, jeopardizing the economic recovery.

Waller addressed those judgments on Saturday, admitting that some of the criteria the Fed had in place before it began reducing its monetary stimulus were too “restrictive.” Instead of reducing monetary accommodation “later and sooner,” Waller said the Fed might have been able to do it “sooner and gradually.”

The central bank is now poised to continue to tighten monetary policy with force, with Powell indicating that it will maintain an aggressive pace until officials see “compelling evidence” that inflation is moderating. This implies a series of decelerating monthly inflation figures.

For his next meeting in July, the president said the Fed would likely choose between a 0.50 or 0.75 percentage point hike, but some economists believe an even bigger move of a full percentage point n is not completely irrelevant.

Neel Kashkari, the dovish chairman of the Minneapolis Fed, said on Friday he could support another 0.75 percentage point move next month, but warned the central bank against “too much frontloading.” .

He said a “cautious strategy” could continue with half-point rate hikes after the July meeting “until inflation is on track to come down to 2%”.

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