If the economic data support a half-percentage-point increase to interest rates, New York Fed Bank President John Williams would endorse the hike.
But Williams refrained from talking too much about the next two-day FOMC policy meeting in May, noting that it is only March.
Still, he believes that the central bank needs to lift the benchmark fed funds rate to more “normal” levels. Ultimately, Williams noted, the pace of rate hikes will depend on the economic data.
“If it’s appropriate to raise interest rates by 50 basis points at a meeting, then I would think we should do that. If it’s appropriate to do 25, we should do that. I don’t see any reason not to do one or the other,” William said at an event sponsored by the Bank of International Settlements (BIS) and the central bank of Peru.
Loretta Mester, the Cleveland Fed Bank President, told reporters Wednesday that the institution could begin “front-loading” rate hikes heading into the summer and begin trimming the more than $9 trillion balance sheet.
Mester conceded that “inflation is very elevated” and that “it is well above our goal.”
“We have to do what we can with both our policy tools to get inflation under control,” she said during a roundtable discussion with the press. “I think the markets can handle it. We just need to get on with that process.”
She shared Williams’ sentiment that there is still plenty of time before the May meeting.
Everything is on the table right now, San Francisco Fed Bank President Mary Daly explained in an interview with Bloomberg on Wednesday, adding that the data in the coming weeks “will tell us whether 50 basis points or 25 basis points and the balance sheet is the right recipe.”
With more Fed officials acknowledging their mistake of underestimating inflation and now wanting to be more aggressive, there could be a concern of going too far, warns Minneapolis Fed Bank President Neel Kashkari.
Kashkari told the Fargo-Moorhead-West Fargo Chamber of Commerce’s Midwest Economic Outlook Summit that inflation is not as temporary as he and most of his colleagues had initially anticipated, purporting that “we just have to respond.”
“There’s a danger to overdoing it,” he cautioned.
This comes soon after Fed Chair Jerome Powell presented a more hawkish stance during his speech to the National Association of Business Economists’ (NABE) Policy Conference, suggesting that he would back a 50-basis-point hike if necessary.
“We will take the necessary steps to ensure a return to price stability,” Powell stated. “In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than (a quarter-point) at a meeting or meetings, we will do so.”
His prepared remarks came after a poll (pdf) of NABE member economists revealed that 77 percent thought the central bank’s policy rate was too low.
Hawks Devour the Doves?
Doves have ostensibly disappeared from the FOMC as the hawks took over the rate-setting Committee, says Scott Anderson, the chief economist at Bank of the West Economics.
“This is what it sounds like when Doves Cry. There are really no doves on the FOMC today only hawks as consumer inflation reaches 40-year highs and is set to rise further as oil and other commodities move even higher on stiff energy sanctions and the outbreak of war on the European Continent,” he wrote in a research note Friday.
But the Fed has little choice but to keep its foot on the gas pedal, averring that the real inflation-adjusted interest rates fall further into subzero territory.
At the same time, Anderson stated, the hiking cycle, the war in Eastern Europe, and energy and financial sanctions will weigh on U.S. and global GDP growth estimates for 2022, 2023, and 2024. This situation could result in “one of the fastest and potentially one of the shortest rate hike cycles from the Fed in decades.”
“Buckle up folks, this landing is bound to get rough,” Anderson said.
Although the odds of an economic downturn happening this year are low, the United States is heading toward a recession in 2023, forecasts Jeff Klingelhofer, the Co-Head of Investments and Portfolio Manager at Thornburg Investment Management.
“This is still a Fed game,” he wrote in a note.
“The Fed continues to drive while keeping their eyes fixed on the rear-view mirror. While the Fed all but conceded they should have hiked rates earlier, they aren’t able to square that comment with an admission that they are behind the curve.”
Even if the Fed raises interest rates six to eight times over the next year, real interest rates are still negative, says Nancy Tengler, CEO and CIO at Laffer Tengler Investments.
“Interest rates are as negative as they have been since the series began in 1953,” stated Tengler.
“We think the market may be overshooting what the Fed will do this year, not necessarily what they should do. That said, at the margin we can agree rates are rising in the near term.”
According to the CME FedWatch Tool, most of the market is penciling in a half-percentage-point rate hike at the start of May, which would push the target rate to 0.75 percent to 1 percent.
Goldman Sachs forecasts that the Fed will increase rates by 50 basis points at both the May and June policy meetings, with analysts expecting a shift in sentiment from “steadily” to “expeditiously.”