Fed policymakers march to bigger rate hike in May

Cleveland Federal Reserve Chair Loretta Mester delivers her keynote address at the 2014 Financial Stability Conference in Washington December 5, 2014. REUTERS/Gary Cameron

March 23 (Reuters) – The Federal Reserve must act aggressively to bring down high inflation, which could very well include a half-percentage-point rate hike at its next policy meeting in May, officials said. said two U.S. central bank policymakers on Wednesday. .

“I’d like to anticipate some of that,” Cleveland Fed President Loretta Mester said on a call with reporters when asked about the trajectory of interest rate hikes this year. “I think it’s important that we start to increase that rate and I think that positions us better if we do that sooner rather than later for what happens in the second half.”

Her sense of urgency was echoed by San Francisco Fed President Mary Daly, who said she would support such a move if the data warranted it, noting that “inflation, inflation, inflation” was everyone’s main concern.

“I have everything on the table right now. If we’re going to do 50 (basis points), 50, that’s what we’ll do,” Daly said at an event hosted by Bloomberg.

Daly has often been more cautious than his colleagues when it comes to policy tightening, and his openness to a larger-than-usual rate hike in May shows the Fed’s growing sense of urgency that inflation, exceeding the central bank’s 2% target more than three times, requires swift and concerted action to prevent it from taking root.

Fed Chairman Jerome Powell said earlier this week that the central bank would move “quickly” to raise interest rates this year and left the door wide open for a bigger hike at the policy meeting. May 3 and 4. Read more

Markets have embraced this view, with traders forecasting two half-percentage-point hikes in upcoming meetings, and a year-end policy rate range of 2.25% to 2.5%.

BALANCE SHEET REDUCTIONS

Powell, speaking Monday at a National Association for Business Economics conference, also said May could mark the start of cuts to the central bank’s nearly $9 trillion balance sheet, which has soared during the pandemic. of COVID-19 as policymakers scrambled to support the economy.

Reducing the Fed’s portfolio of Treasuries and mortgage-backed securities would put further downward pressure on inflation, provided that what Daly said on Wednesday was equivalent to at least a one-year rate hike. quarter of a percentage point this year.

“I think the data will tell us whether 50 basis points, or 25 basis points with the balance sheet, is the right recipe; or 50 basis points with the balance sheet,” she said.

Last week, Fed policymakers forecast a total of seven rate hikes for 2022, a view that Daly said incorporates some “anticipation” of policy tightening.

“We are ready to do whatever it takes to ensure price stability, and following all the other challenges we have,” Daly said.

Mester also told reporters there was nothing stopping the Fed from raising interest rates and starting to shrink its balance sheet at the same policy meeting.

“I think given the situation we’re in and the communications President Powell has already made on the stocktaking process, I don’t fear it’s destabilizing, and I think we have to recognize that inflation is very high,” Mester said, noting that financial markets could handle such a move. “We have to do what we can with our two policy tools to get inflation under control.”

Mester also reiterated his view that 2.5% would be the appropriate level for the fed funds rate at the end of this year, which would require “some” 50 basis point rate hikes. Read more

Daly said she thinks the Fed’s benchmark overnight interest rate will likely need to rise above 2.5%, but not until next year.

Reporting by Lindsay Dunsmuir and Ann Saphir; Editing by Paul Simao

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