The Fed could increase the interest rate increase to half a percentage point if inflation remains persistently high, said a senior US Federal Reserve official.
Rafael Bostic, president of the Fed’s Atlanta branch, is sticking to his call for a three-quarter-point increase in interest rates in 2022, the first coming in March in an interview with the Financial Times. But he said a more aggressive approach is possible if justified by economic data.
This could mean raising interest rates at each of the seven remaining political meetings in 2022, or even the Fed’s ability to raise interest rates on federal funds by half a percentage point, doubling its typical amount and an instrument it hasn’t used in about two decades.
“Every option is on the table for every meeting,” Bostic said on Friday. “If the data says that things have developed in a way that requires a movement of 50 basis points or [would] be appropriate, then I will focus on that. . . If moving to consecutive meetings makes sense, it will be convenient for me.
“I think there’s been an opinion that we have some meetings where we really just recruit him and that he doesn’t have the ability to act, and that’s just never been my thinking.”
He added that he would watch closely for the slowdown in monthly consumer price gains and further evidence that rising wages do not fuel meaningfully higher inflation when he thinks about his interest rate forecast. He said he was encouraged by the latest Employment Expenditure Index (ECI) report, released on Friday, which tracks wages and benefits paid by US employers and expects wage growth to slow in the future.
Bostic’s comments reflect those of Jay Powell, chairman of the central bank, who this week refused to rule out even the strongest political responses to quell inflation, which has been moving at the fastest pace in about 40 years.
Instead, Powell said the Fed will be “modest and agile” as it seeks to “permanently move away” from the ultra-easy monetary policy it introduced in early 2020 to protect the economy from the Covid-19 shock. .
As a result, market expectations have changed, with retailers now pricing with another quarter rate increase this year, a total of five.
The Fed’s embrace of a much more hawkish position shook global financial markets, leading to extreme volatility this month and sharp losses for US stocks.
The head of the Fed in Atlanta expressed little concern about the recent changes and said it was a natural response from the Fed, which is beginning to withdraw its support.
“Reducing accommodation should lead to narrower financial markets,” Bostic said. “The development we have seen on this front is comforting in the sense that markets are still functioning as expected and responding to conditions in ways that are rational and appropriate.”
However, he said he was keeping a close eye on overnight loan markets, especially for signs of stress similar to the 2018 episode when financial markets took off as the Fed tightened monetary policy further, despite fears of a slowdown in growth.
Bostic, who also supports the Federal Reserve cutting its $ 9 trillion balance sheet “as soon as possible” without disrupting the market, said he was “optimistic” about how the economy would perform in the coming months, despite rising inflation. .
He also dismissed claims that the Fed would raise interest rates too aggressively and in a way that would prove harmful.
“The path of our policy is not a path of restraint. This is a less flexible way, “he said. “If we do the three [interest rate increases] which I mean, this will still leave our policy in a very appropriate space.
“I don’t think there will be many restrictions on growth as long as we remove these urgent actions.”