Fed will increase rate with an eye on inflation

Howard Schneider and Ann Saphir

SAN FRANCISCO/ATLANTA -Federal Reserve policymakers said that new inflation data released later this week will allow them to decide if they can slow the pace at which they raise interest rates at their upcoming meeting. They want only a quarter point increase, instead of the large jumps they used for most 2022.

Raphael Bostic of Atlanta Fed Bank stated Monday that if U.S. Consumer Price Data released on Thursday confirms cooling, he would have had to take a quarter-point increase “more seriously” in order to continue in that direction.

He stated that he wanted to see 25 basis point rate increases eventually. “The timing of this will depend on the data that comes in.”

In a Wall Street Journal interview, Mary Daly, President of San Francisco Fed, stated that both 25 and 50 basis-point rate increases are “on the table”.

Bostic is also expecting the Fed’s policy rate of 4.25% to 4.5% to increase to a 5% or 5.25% range in order to tackle inflation.

Daly stated that taking “gradual steps” to get there will give you the ability respond to incoming information and to account for the delayed effects of higher borrowing costs on broader economic activity.

She said that while she is data-dependent, she does not want to wall off an increase of 50 basis points. She also stated that she will be closely monitoring the consumer price index report this week for any indications of improvement in the most persistent aspect of the inflation picture, which is the price of core services, excluding shelter.

Fed policymakers have been urging their members to be more positive after almost a year of aggressive rate increases to slow the economy, bring down inflation, and say that the recent slowing in job growth and wage growth could indicate a cooler future.

However, they refuse to stop rate hikes or to downshift to smaller rate-hike increments at once for fear of encroaching on high inflation and forcing the Fed into raising rates.

While they are deciding the size of the rate hikes they will make over the next meeting, policymakers continue to debate the appropriate rates and how long they need them to remain there to bring inflation closer toward the Fed’s target of 2%.

In December’s minutes of the Fed’s December policy meeting, it was clear that no Fed policymakers anticipated a rate cut this year. This contrasts with market expectations that the Fed would begin cutting rates in the second half this year, possibly to respond to a slowing economy.

Bostic stated Monday that his base case is for no rate reductions in 2024, although it has large confidence bands.

This would make him one of the Fed’s most hawkish policymakers. Most expect cuts in the Fed policy rate to below 4.5% next fiscal year.

Daly stated that the Fed will tighten policy and the U.S. unemployment rates, currently at 3.5%, will rise to 4.5% or 4.6%. Inflation, which is now running at 5.5% according to the Fed’s preferred measure of inflation, will drop to the low 3% range by 2023 and close to 2% by 2024.

To bring down inflation faster than that, it would require “enormous” labor markets pain, which Daly stated she isn’t willing to inflict.

(Reporting and Editing by Ann Saphir; Editing By Josie Kao