U.S. central bankers on Monday signaled they see interest rates staying high and, if anything, going higher, given sticky inflation – a stark contrast with the market’s view that the Federal Reserve will be cutting rates well before 2023 is over.
Now that the Fed has increased its benchmark overnight interest rate to a range of 5.00%-5.25%, Atlanta Fed President Raphael Bostic told CNBC, “the appropriate policy is really just to wait and see how much the economy slows from the policy actions that we’ve had.”
Inflation has eased some and should cool further, he said, but the process will not be quick enough to merit rate cuts anytime soon.
Indeed, he added, “if there is going to be a bias to action, for me there would be a bias to increase a little further, as opposed to cut.”
Minneapolis Fed President Neel Kashkari said the Fed probably has “more work to do on our end, to try to bring inflation back down.” Inflation, which edged down in April to a 4.9% annual pace from 5% in March based on the Consumer Price Index, is still “much much too high,” he said, and the labor market, with 3.4% unemployment, is still hot.
“We should not be fooled by a few months of positive data,” Kashkari told the Minnesota Transportation Conference & EXPO in St. Paul, Minnesota. “We still are well in excess of our 2% inflation target, and we need to finish the job.”
Chicago Fed President Austan Goolsbee said that voting for the U.S. central bank’s most recent rate hike in May was for him a “close call” because of his worries over tightening credit conditions in the wake of recent bank failures.
And he said he believes the full impact of the Fed’s rate hikes so far have yet to be felt. “We want to be sure, to the extent possible, to get inflation back to the correct path, the target path, without starting a recession,” he told CNBC.
But he also had a warning, reminding listeners that Silicon Valley Bank had stopped hedging against higher rates “because they believed what the market was saying” about a coming reversal in the Fed’s rate-hike policy. The failure to manage interest-rate risk was a key factor in the collapse of the Santa Clara, California-based lender in March.
Financial markets, meanwhile, are factoring in only a small chance of a further rate hike at the Fed’s June 13-14 policy meeting, and interest rate futures contracts are pricing for the policy rate to end the year in the 4.25%-4.50% range.
Part of that pricing could be reflecting hedges against a deeper recession than is widely expected. Bostic on Monday said that any recession would likely be neither long nor deep.
Financial markets may also be expecting inflation to fall quite quickly.
“Market pricing is too aggressive in expecting a lower (federal) funds rate over time,” Jan Hatzius, chief economist at Goldman Sachs, said at an event at the Atlanta Fed. “The economy continues to expand even with inflation subsiding.”
(Reporting by Dan Burns, Ann Saphir, Howard Schneider; Editing by Paul Simao)
