Federal Reserve officials face pressure for more aggressive action after a hotter-than-expected inflation reading for April, though so far officials are sticking with their strategy to keep raising interest rates by a half point at each of their next two meetings.
“We’ve got a plan in place, which is 50 basis points at the last meeting and teeing that up for future meetings as well,” St. Louis Fed President James Bullard said during an interview with Yahoo! Finance on Wednesday. “I think that’s a good benchmark for now.” Asked if a 75 basis point move might be necessary, Bullard said that was not his base case.
Investors seem to agree that a 75 basis-point hike isn’t likely, according to pricing in federal funds futures markets. But traders did increase bets that the Fed will roll out another half-point hike in September -- following increases of that size in June and July -- after a Labor Department report earlier showed that consumer prices excluding food and energy increased by more than forecast in April.
The US central bank hiked rates by a half-point last week and Powell signaled the same was on the table for the next two meetings of the policy-setting Federal Open Market Committee, while pushing back against making a larger move.
Bullard said the inflation report showed that price pressures were broader and more persistent than many had thought and his Atlanta colleague Raphael Bostic told a separate event in Jacksonville, Florida, that he would “be supporting moving more” if inflation continued at the current high pace.
Still, Fed watchers said the April CPI reading was not what the Fed was hoping to see and the narrative around a larger move could start to shift, especially if May’s inflation report also came in hot. That data release is due on June 10, ahead of the FOMC meeting June 14-15.
“This should put talks of 75 basis points back on investors’ minds as well as the FOMC table,” Roberto Perli, head of global policy research at Piper Sandler & Co., wrote in a note to clients. “It’s too soon to tell what the Fed will do in June because there is another CPI report a couple of days before the meeting, but there is now upside risk relative to the 50 basis points that seemed a forgone conclusion.”
Other Fed watchers argued that the central bank is likely to stick to the plan it’s laid out for the next few meetings.
“It’s a high bar to shift away from guidance, but today’s outcome most certainly was not what the Fed assumed,” said Karim Basta, chief economist for III Capital Management in email to clients. Powell’s comments “leave the door open to alter the outcome,” and the next inflation report will be “highly important,” he wrote.
Cleveland Fed President Loretta Mester said Tuesday that she supports raising rates by a half point at the next couple of meetings and then speeding up, or slowing down, the pace of increases based on what happens with inflation.
“We don’t rule out 75 forever, right? The cadence we’re going now seems about right to me,” Mester said during an interview on Bloomberg Television on Tuesday. “We’re going to have to assess whether inflation is actually moving down, and then we’ll be able to get more information after we do a couple of those to see,” she said, referring to 50 basis-point hikes.
Policy makers could raise rates more modestly by 25 basis points in September if future reports show that inflation is beginning to weaken, said Pablo Villanueva, senior US economist for UBS Investment Bank.
“We think the inflation outlook is going to look very different in September than the current situation,” said Villanueva, though the risk of a half-point move that month “would increase if inflation remains strong.”
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