Two Federal Reserve officials speaking Wednesday said more aggressive interest rate hikes are likely necessary to slow inflation, as is the central bank keeping rates at elevated levels for some time.
Minneapolis Fed President Neel Kashkari said Wednesday he is remaining "open-minded" about whether the Fed should raise rates by 25 or 50 basis points at its next policy meeting on March 21-22. Markets currently expect a 25 basis point, or 0.25%, rate increase from the central bank.
"I’m open-minded about whether it's 25 or 50 basis points [at the next meeting]," Kashkari said during a Q&A at a Sioux Falls Business CEO event. "What's more important is what we signal in the dot plot." The Fed will release a new set of economic forecasts and interest rate expectations alongside its March 22 policy statement.
Kashkari said in December, he jotted down raising interest rates up to 5.4% and holding rates at that level for an extended period. "At this point I haven't decided what my dot is, but I would lean towards continuing to raise further that I would continue to push up my policy path."
"Given the data in the last month — higher inflation than we expected and a strong jobs report — these are concerning data points suggesting we're not making progress as quickly as we'd like," Kashkari said. "At the same time shouldn't overreact to one month of data even if the data is troubling."
Kashkari is a voting member of the FOMC, the Fed committee that sets monetary policy, in 2023.
Elsewhere, Atlanta Fed President Raphael Bostic said Wednesday he believes the Fed needs to raise its policy rate by 50 basis points, to a range of 5%-5.25%, and hold it at that level until well into 2024.
"We must determine when inflation is irrevocably moving lower," Bostic wrote in an essay published Wednesday. "We're not there yet. That's why I think we need to raise the federal funds rate to between 5-5.25% and leave it there well into 2024. This will allow tighter policy to filter through the economy and ultimately bring aggregate supply and aggregate demand into better balance and thus lower inflation."
Bostic is not a voting member of the FOMC in 2023, but will be a voting member in 2024.
Bostic said in order to consider reversing the course of monetary policy, he needs to see a better balance in the job market between labor supply and demand and see broad-based inflation narrow. Bostic noted about half of the goods in the CPI market basket still show inflation rates of 6% or higher. The Fed targets inflation that averages 2%.
"If we are going to get inflation back in the range of our target, the breadth of inflation will have to narrow considerably," Bostic wrote. "When inflation is no longer top of mind, our mission will largely be accomplished. We are clearly not there yet. But I—and the Committee—are committed to doing all we can to ensure that we get there as soon as possible."
Both Bostic and Kashkari noted that while the increase in interest rates has slowed the housing and real estate sectors, they aren’t seeing many signs higher rates are really slowing down the rest of the economy.
"Business contacts tell us activity may well soften, but they don't anticipate a severe deterioration," Bostic wrote. "When businesses think customers will buy less of their product or service in the near and medium term, then they will adjust hiring and investment plans accordingly."
Kashkari said the U.S is not in recession right now pointing to strong job growth, but said whether the Fed can avoid causing a recession with its interest rate hikes to fight inflation — a so-called soft-landing —remains an open question.
"The track record is not good at being able to slow down the economy this much without going a little too far and heading into recession," he said. "[But] typically, when the central bank has caused a recession by raising interest rates, the bounce back can be very fast."
Kashkari said the dynamics in this economic cycle are different given families and states have strong balance sheets and supply chains are getting better.
Both Fed officials said the cost of raising rates too much outweighs the costs of raising rates too little, adding the Fed must avoid a 1970s scenario in which the central bank cut rates too soon, causing inflation to re-surge and forcing the Volcker-led Fed to hike rates much higher to ultimately bring down inflation.
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