Federal Reserve officials dimmed rising market expectations for an
aggressive initial response to US inflation rising to a record high in 40
years, signaling that steady rate hikes should be enough to do the trick.
"I don't see any convincing argument for taking a big step in the first
place," said New York Federal Reserve Bank President John Williams, the No.
2 official on the central bank's policy-setting panel, as quoted by Reuters.
"I think we can continue to raise rates and reassess," he said at an online
event.
Fed Governor Lael Brainard said officials are likely to begin a "series of
rate hikes" at their upcoming meeting in March, followed by a reduction in
the Fed's balance sheet size "at the forthcoming meeting."
Brainard, speaking at a conference in New York, made no specific
recommendations for the upcoming meeting, but said recent changes in
financial markets, including hikes in mortgage rates, were "consistent with"
where the Fed is headed.
"The market is clearly attuned to that and is advancing changing financing
conditions in a manner consistent with our communications and data," said
Brainard.
Investors in federal funds futures contracts last week began to lean toward
the idea that the Fed will raise interest rates by half a percentage point
in March.
Those expectations have now reversed, with a quarter-point gain now
anticipated and a total of six gains so far for the year.
In remarks at a conference in New York, Chicago Fed President Charles Evans
downplayed the idea that the Fed needed to be more aggressive, although he
agreed the policy was a "misstep" with annual consumer price increases of
7%.
He said he remained confident inflation would subside on its own.
"I see our current policy situation as likely to require fewer financial
restrictions than in previous episodes and pose less risk," Evans said at a
separate event in New York.
"We don't know what lies on the other side of the current spike in
inflation... We may once again see a situation where there is nothing to
fear from running a hot economy."
The remarks came at the end of a tumultuous week in which traders piled on,
and then backed away from, bets that the Fed will begin its round of rate
hikes next month with a larger-than-usual half-point hike.
Fed President St. Louis James Bullard has fanned those expectations with a
call to raise interest rates by a full percentage point at the Fed's June
meeting, a rate path that will require at least one half-point hike between
now and then.
Policymakers at the central bank have said they will start raising borrowing
costs next month to cushion inflation that has already exceeded their 2%
target, and economists expect the Fed to embark on its longest series of
rate hikes in decades.
Fed Chair Jerome Powell has been openly silent since January, so Williams
and Brainard's comments provide the best possible direction on the
prevailing view at the core of Fed policy-setting.
Powell, however, will have a chance to shape expectations on March 2 and 3
when he delivers his semiannual monetary policy update to Congress at
hearings announced on Friday by the House Financial Services Committee and
the Senate Banking Committee.
The Fed should start raising rates next month and, once rate hikes are
underway, begin to "stably and predictably" trim the $9 trillion balance
sheet, Williams said. The two actions, he said, would make demand more
balanced with supply.
At the same time, he said, other forces should also lower inflation, with
supply chains recovering and consumers returning to pre-pandemic spending
patterns.
Williams said policymakers could speed up or slow down the pace of rate
hikes later as needed.
A path in which the overnight federal funds rate moves to a range of 2% to
2.5% by the end of next year makes sense, he said.
Williams said he expects real US GDP to grow a little less than 3% this year
and the unemployment rate to fall to around 3.5% by year-end.
He projects inflation as measured by the personal consumption expenditures
price index to fall to around 3% and fall further next year as supply
challenges improve.