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Fed officials weigh whether rates are high enough as inflation expectations rise
By Ann Saphir and Howard Schneider
NEW ORLEANS (Reuters) – The debate over whether U.S. interest rates are high enough has deepened among Federal Reserve officials this week, and could become even more heated after a key survey showed a jump in U.S. inflation expectations. consumers.
“There are… important upside risks to inflation that are on my mind, and I think there are also uncertainties about how restrictive the policy is and whether it is restrictive enough” to return inflation to the U.S. central bank’s 2% target , said Lorie, president of the Dallas Fed. Logan said at a Louisiana Bankers Association conference in New Orleans.
“I think it’s too early to be thinking about cutting rates… I think I need to see some of those uncertainties resolved about the path we’re going on, and we need to remain very flexible,” Logan said, though he did. does not directly address whether she feels the Fed may need to raise its benchmark interest rate again from the 5.25% to 5.50% range it has maintained since July.
Many U.S. central bank officials, including Fed Chairman Jerome Powell, have said they still think further rate hikes will be unnecessary.
In an interview with Reuters, Atlanta Fed President Raphael Bostic said he still thinks inflation is likely to slow under current monetary policy and allow the central bank to begin reducing its key rate in 2024 – although perhaps by just a quarter. percentage point and not until the last months of the year.
“I still believe that,” Bostic said in Thursday’s interview, although “it’s going to take some time” to be sure inflation will come down.
But the outlook is changing after three months in which inflation stopped improving.
Friday’s data provided yet another jolt in the wrong direction. Inflation expectations for next year in the University of Michigan consumer sentiment survey rose from 3.2% to 3.5% in May, the highest level since November, and long-term expectations also rose.
While the one-month reversal may not be significant, if it continues, it would challenge the Fed’s current assessment that expectations are “anchored” – and would join arguments made by Logan and some others that rates may not be high enough to end the fight against inflation.
Anchored expectations are seen by Fed officials as an important sign of their own credibility and a help in bringing inflation back to 2%.
Chicago Fed President Austan Goolsbee, in an appearance at the Minnesota Economic Club, said a rise in inflation expectations “predicts dire” progress in inflation, but the immediate results were not a concern.
The story continues
“There’s not a lot of evidence that inflation is stagnating,” Goolsbee said, adding that he considers current policy “relatively restrictive.”
The University of Michigan data was released after Logan began her comments, and she did not address the topic.
The survey also showed an overall drop in consumer sentiment, a mixed signal that could point to lower consumer spending in the coming months even as households expect higher inflation.
“The Fed is walking a tightrope as it balances price stability and growth mandates,” wrote Jeffrey Roach, chief economist at LPL Financial. “Although this is not our base case, we see increasing risks of stagflation”, in which growth slows and price increases remain strong.
The Fed’s preferred measure of inflation, the personal consumption expenditures price index, rose at an annual rate of 2.7% in March, with little progress shown in the first three months of the year.
‘Raises questions’
In an essay published earlier this week, Minneapolis Fed President Neel Kashkari also raised the possibility that rates may not be restrictive enough given the continued strength of the U.S. economy, particularly the housing market.
“It is difficult for me to explain the robust economic activity that has persisted,” Kashkari said. “This raises questions about how restrictive the policy really is.”
In contrast, San Francisco Fed President Mary Daly, in a recorded interview on Thursday, said it is possible that the “neutral” interest rate for the U.S. has risen a bit, implying that any rate level policy framework would depend less on the economy. activity than it would otherwise be.
But she said the solution for the Fed in this case would be to keep its policy rate at its current level for longer.
Even if the neutral rate is higher, “we still have a restrictive policy, which is what we want,” Daly said. “But it may take longer to… reduce inflation.”
(Reporting by Ann Saphir in New Orleans and Howard Schneider in Washington; Editing by Paul Simao and Chizu Nomiyama)