Top Fed officials see no ‘compelling’ reason to wait for fresh rate hike

A top Federal Reserve official said there was no “compelling” reason to wait before implementing another interest rate hike, as economic data confirmed more must be done to get US inflation under control.

In an interview with the Financial Times, Cleveland Fed President Loretta Meister pushed back against recent suggestions from some policymakers who argued that the US central bank should leave the rate hike to its next meeting in June.

“I don’t really see a compelling reason to stop — meaning wait until you have more evidence to decide what to do,” she said. “I would see a compelling case for bringing (rates) up . . . and then holding off for a while until you’re less uncertain about where the economy is going.

Agreement on the US borrowing limit between the White House and Republican congressional leaders later this week “relieves a great deal of uncertainty about the economy”, he said. The deal still must be approved by both chambers of Congress, with the first vote in the House of Representatives scheduled for Wednesday.

Meister’s comments come amid division among US policymakers over fresh rate hikes, with some officials hinting at a pause in June before resuming at a later date when the economic picture becomes clearer. Meanwhile, others signal the Fed may not need to tighten further.

Philip Jefferson, the Fed governor who was recently tapped by the Biden administration to serve as the central bank’s vice chairman, indicated on Wednesday that he may support skipping the hike next month, on Emphasizing that the full effects of the tightening are yet to filter in. economy. He also warned that higher interest rates could “exacerbate stress” in the banking sector.

“The decision to hold our policy rate steady at the coming meeting should not be interpreted to mean that we have reached peak rates for this cycle,” he said in a speech. “In fact, skipping a rate hike at its upcoming meeting would allow the (Federal Open Market Committee) to see more data before making a decision about the extent of additional policy firming.”

Mester argued Tuesday that the bank will always have to operate with some uncertainty over the economy’s trajectory and said the Fed should pause only if the risks of doing too little are equally balanced with those of doing too much.

The only reason to skip a rate hike when it is clear that more stringency is necessary would be extreme market volatility or some other shock, such as a possible US debt default, Mester said.

Mester said she could still be influenced by Friday’s employment data as well as the next inflation report, which will be released ahead of a two-day gathering of US central bankers starting June 13.

However, Meester, one of the more militant regional chairmen, indicated she was disappointed with the progress made so far in controlling price pressures.

“I think we may have to go further,” she said. “At this point, I really don’t see a compelling reason why we wouldn’t want to take another small step to combat some of these really embedded, stubborn inflationary pressures.”

His comments marked the latest intervention in a tense debate among officials over whether the Fed has squeezed the economy hard enough to bring down inflation. It has increased its benchmark rate by more than 5 per cent in a little over a year.

After a series of jumbo rate hikes, the fed funds rate now hovers between 5 percent and 5.25 percent. In March, most officials predicted that level would mark the peak of the tightening campaign.

Mester, who won’t become a voting member of the policy-making FOMC until next year, said future rate-setting decisions will become more fraught.

Several voting members of the FOMC have recently expressed skepticism over the need for the impending halving.

However, Chairman Jay Powell recently indicated that he favors a pause, pointing to the number of rate hikes the Fed has implemented. They have also argued that the recent banking turmoil will strengthen financial conditions and that in fact some of the central bank’s work for this.

“How do we measure the trade-offs, we’re getting to the real hard part here,” Meester said. “Different policy makers will have different views on how they are assessing things.”