More interest-rate hikes are needed to fight inflation, Fed officials say
Federal Reserve Bank of Dallas President Lorie Logan said that without additional rate hikes, inflation won't get back down to the central bank's 2% target.
On Friday, the first day that Federal Reserve officials were able to speak publicly about the central bank's vote earlier this week to make no change to its interest-rate policy, two top officials said the Fed would need to hike rates in coming months in order to counter inflation pressures.
The comments show there is no settled policy at the central bank when it comes to communicating to the public about the economic outlook. Since taking over as Fed chair in May, Kevin Warsh has been pulling back on commenting on how he views past data and future economic trends.
But on Friday, Dallas Fed President Lorie Logan and St. Louis Fed President Alberto Musalem did comment on those topics. Both said it was important for the Fed to explain to investors what officials are thinking.
"The Fed's interest-rate committee clearly hasn't bought into the new chair's slimmed-down conception of policy communications," Michael Feroli, chief U.S. economist at J.P. Morgan, wrote in a note to clients this week.
Feroli said it was essential to the markets that the Fed explain why the Federal Open Market Committee hiked rates in September following a 0.2% increase in core personal consumption expenditures but kept rates unchanged this week despite expectations of an even hotter inflation reading. That reading came in at 0.3% on Thursday.
Gregory Daco, chief economist at EY-Parthenon, agreed that Warsh fell short by failing to provide a coherent argument for not raising rates in October.
While the Fed chief didn't convey a clear bias to hike again in December, both Logan and Musalem did.
In a speech at Davidson College in North Carolina Friday, Logan, who voted on Wednesday to keep rates unchanged, said the Fed needs to implement "at least" two more quarter-point hikes.
"I currently estimate that the fed-funds target range is at least 50 basis points - half a percentage point - below the level that would create some modest restriction and begin to bring the inflation trend back to target," Logan said.
Without those additional rate hikes, she added, inflation will continue to trend above the Fed's 2% target, unless unexpected shocks to the economy, like a downturn, occur.
She said the Fed could pause after these moves and reassess the economic outlook.
In September, the Fed hiked interest rates by a quarter-point to a range of 3.75-4%. It was the first hike in three years and signaled a reversal of the policy of trying to engineer a soft landing for the economy by slowly bringing interest rates and inflation down at the same time. At that meeting, 16 of 18 Fed officials penciled in another hike this year.
Trader in futures markets see a 70% likelihood of a December rate hike. The chances of another hike in March dropped sharply Friday with the weakness in the stock market, however. Traders see hardly greater than a 50/50 chance of a March hike, down from 62% the day before.
Many economists noted that the inflation data released after the Fed's September meeting was even hotter than before the committee raised rates, and they argued the Fed should have hiked again this week.
But the Federal Open Market Committee voted 10-2 to make no change in rates. At his press conference, Warsh said officials wanted to wait for more data before acting. Many economists criticized Warsh for not saying more about his thoughts on the road ahead and said they would instead look to officials like Logan and Musalem for a sense of what may be to come.
Logan explained that she supported the pause this week because raising rates gradually "can help households, businesses and market participants adapt to higher rates and reduce the risk that economic activity deteriorates more sharply than necessary."
She added: "Skipping a meeting does not change the monetary-policy destination."
As long as market participants understand the Fed's policy plans, the precise timing of each rate increase has little effect on the longer-term rates most borrowers pay, she said.
In a separate speech to economists in New York, Musalem also backed a plan to keep raising interest rates.
Musalem said it was his base-case scenario that inflation will only come down if there are more rate hikes.
"I judge that additional firming of monetary policy will be necessary, and soon," Musalem said.
"Moving sooner in smaller steps while inflation expectations are anchored has a better chance of succeeding without adverse impact on the labor market or economic growth," he added.
The next meeting of the Fed's interest-rate committee is Dec. 8-9.
Richmond Fed President Tom Barkin, meanwhile, said the "direction of travel is pretty straightforward," with the only question being the pace of future moves.
Tim Duy, chief economist at SGH Macro Advisors, said in a post on X that if Warsh had given Barkin's outline of the Fed's strategy at his press conference after the Fed's first rate hike in September, "everyone would have been save [sic] a lot of grief."
Barkin noted there could be a case for higher rates if artificial-intelligence spending continued at a strong pace.
"If we do see a continued surge in demand, that would be the kind of thing you might want to lean against," Barkin said in an interview on "The Business Briefing" on Sirius XM.
"It's also the case that if we create a more productive economy and AI is leading to much stronger growth, that's an economy that can handle higher interest rates," he said.
Barkin also supported moving slowly on tightening policy.
"I think gradual makes sense when you're not much behind the curve, where you want time to learn, both from the economic environment and the external environment," he said.
-Greg Robb
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