Fed’s Waller backs 50bps rate hike in ‘several’ meetings

© Reuters. FILE PHOTO: The Federal Reserve Building on Constitution Avenue in Washington, U.S., March 27, 2019. REUTERS/Brendan McDermid/File Photo

(Reuters) – Federal Reserve Governor Christopher Waller said on Monday that the U.S. central bank should raise interest rates by half a percentage point at each of its next two or more meetings, underscoring how aggressively the central bank can tighten as it responds Policy tensions to reduce high inflation.

“I support an additional 50 basis points of policy tightening in several meetings,” Waller said in prepared remarks at the Institute for Monetary and Financial Stability in Frankfurt, Germany. “In particular, I’m not giving up on raising rates by 50 basis points until I see inflation falling closer to our 2% target.”

The Fed raised its benchmark policy rate by 0.5 percentage points earlier this month, with a target range of 0.75% to 1%, and plans to raise rates further at its next two meetings in June and July.

The Fed debate has turned to the rate hikes needed for the rest of the year. Most policymakers said they wanted to see how much inflation would fall in the summer before deciding whether to increase or decrease the rate hikes in September.

However, one policymaker, Atlanta Fed President Rafael Bostic, said last week that he favored a “pause” at the September meeting to allow time to assess the impact of the Fed’s actions on the economy and inflation.

By contrast, St. Louis Fed President James Bullard has said he wants the Fed to raise interest rates to 3.5% by the end of the year, which would involve raising rates by half a percentage point at all the Fed’s remaining meetings.

Waller said he would like to see the central bank raise its policy rate above neutral — a level that neither stimulates nor constrains economic growth — by the end of the year, but seems less aggressive than Bullard. Waller said investors now expect the federal funds rate to be between 2.50% and 2.75% by the end of the year, noting that his plans for rate hikes are not fundamentally different.

The Fed’s moves so far have been met with a sell-off in stocks and a surge in Treasury yields and the dollar on fears that its more aggressive stance could lead to a recession.

Russia’s war in Ukraine and China’s zero COVID-19 policy have also fueled fears of an economic downturn, which further entangle supply chains.

Waller said he was optimistic that a strong labor market could cope with higher interest rates if unemployment rose sharply, adding that he was prepared to take more aggressive action on rates if inflation remained stubbornly high.

There are already signs that inflation has peaked. The U.S. Commerce Department reported on Friday that the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, rose 6.3% in the 12 months through April after rising 6.6% in March.

So-called core PCE prices rose 4.9% year-on-year in April after rising 5.2% in March. Growth, as reflected in the annual core PCE price index, slowed for the second straight month.

But Waller was unimpressed by the readings. “Whatever measure is considered… Headline inflation has been above 4% for about a year, and core inflation has not fallen enough to hit the Fed’s target anytime soon.”

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