Two Federal Reserve officials said Monday that more rate hikes are needed to tame inflation that has proven to be more persistent than previously thought.
One was Cleveland Fed President Loretta Mester, who said she thinks rates need to move up "somewhat further" and be held at that level.
Mester said she hasn’t made a decision about whether rates should move up at the next meeting yet but hinted in a speech at the UC San Diego Economics Roundtable that the Fed’s next move could be to raise rates and then hold them at that level to accumulate more data.
"A slightly higher policy rate would roughly equate the probabilities that the next policy move will be a tightening move versus a loosening move," Mester said. "This would be a good holding point as we accumulate more information about whether the economy is evolving as expected."
The central bank decided to hold off raising rates at its last policy meeting in June while signaling rates could still rise to as high as 5.6%, implying two additional rate hikes are likely this year.
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Some Fed officials wanted to raise rates by 0.25% last month but agreed to the pause anyway, according to minutes from that June meeting of the Federal Open Market Committee (FOMC), the Fed committee that decides on policy. The FOMC will meet again later this month, on July 25th and July 26th.
Mester said if she were acting alone last meeting, she would have voted in favor of raising rates, but she added that the Fed doesn’t like to surprise the markets and there was rationale to take a step back and assess the impact of previous rate hikes.
"Coming into that meeting there was an expectation that we wouldn't be moving rates up," Mester told reporters on a call Monday. "My read of the economic data and the financial market data [was], if it was just me alone, I would have moved the rate up, but I certainly understood the rationale for not moving in June."
Another Fed official who called for higher rates was San Francisco Fed President Mary Daly, who said two more hikes are needed this year to bring down inflation.
“I was in favor of slowing the pace off tightening, but also realizing that we’re likely to need a couple more rate hikes over the course of this year to bring inflation down,” Daly said during a conversation at the Brookings Institution in Washington. “The risks of doing too little outweigh risk of doing too much, but that gap is getting narrower.”
Both Daly and Mester don’t think the economy is in the clear yet when it comes to potential credit tightening from the bank failures earlier this year, even though there’s not much evidence that banks are becoming stricter about lending outside of the Fed’s rate hikes.
“I'm not seeing anything when I talk to banks and see what banks are doing that suggest there's this extra tightening due to stresses in the banking industry,” said Mester. “But I do think it's something that we have to keep an eye on because we don't know necessarily what the magnitude of that could be or the timing of that.”
Daly said she thought the bank stresses from the failures could amount to the equivalent of a 0.25% or 0.50% rate hike but said so far it seems to be less. She noted that lending right now is not much less than what you would expect given the expectation for a slowing economy. But Daly too said it’s too early to declare an all-clear.
“I don't think we can declare there is no credit shock from the banking stresses. I think we still could see it coming in the next number of months,” said Daly.
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