Two senior Federal Reserve officials have said the U.S. central bank is expected to launch a steady series of interest rate hikes from March, in a bid to dampen demand and lower inflation.
Lael Brainard, a Fed governor who was named vice chairman, said Friday that it would be appropriate for the central bank to “initiate a series of rate hikes” from its meeting next month. Financial markets were “clearly aligned” with the decision, she added.
Brainard’s comments, delivered at an event hosted by the University of Chicago Booth School of Business, echoed those of John Williams, chairman of the Federal Reserve Bank of New York, earlier on Friday.
At an event hosted by New Jersey City University, Williams said he supports the “steady” increase in Fed interest rates from their current near-zero levels starting next month.
“With the strength of the current economy and inflation well above our long-term target of 2%, it is time to begin to gradually bring the target range back to more normal levels,” he said.
As members of Fed Chairman Jay Powell’s inner circle, Brainard and Williams’ views carry significant weight as senior policymakers engage in a heated public debate over what the central bank should do to fight back. against inflation.
Their latest guidance comes amid considerable uncertainty about the pace at which it should move away from the ultra-stimulative monetary policy settings that have been in place for two years since the start of the coronavirus pandemic.
Williams told reporters he didn’t see a compelling case for a “big step” in March, but said the tightening process should happen faster than last time when the Fed adjusted for the first time in December 2015, then waited a year to deliver a second quarter. point increase.
James Bullard, chairman of the St Louis Fed and voting member of the Federal Open Market Committee, has been one of the strongest advocates of “preloading” interest rate increases. He called for the federal funds rate to be 1 percentage point above its near-zero level by July.
Bullard has also previously signaled support for a bigger-than-usual half-point interest rate hike next month – although he said he would defer to Powell on the matter.
Several Fed officials have pushed back against the need for such a move, including Esther George of Kansas City and Loretta Mester of Cleveland. San Francisco’s Mary Daly instead called for a “measured” approach to raising the federal funds rate to a level consistent with a slowdown in economic activity.
Market expectations for a half-point interest rate hike in March fell sharply on Friday after Williams’ speech, suggesting investors revised their view of the Fed’s aggressiveness. About six quarter-point increases are planned for this year.
Williams acknowledged that inflation, which has reached its fastest pace in four decades, was hovering ‘far too high’, and said monetary policy had an ‘important role to play’ in helping to bring it under control .
“Demand for goods and some services now far exceeds supply, leading to high inflation,” he said. “With an already very strong labor market, it is important to restore the balance between supply and demand and bring inflation down.”
Divisions within the Fed are even starker on the balance sheet, with some officials arguing for outright asset sales of agency mortgage-backed securities and others preferring a more methodical reduction by no longer reinvesting proceeds from maturing securities. The Fed has yet to say when the process will begin and how quickly it will unfold.
Brainard said it would be appropriate for the Fed to start trimming its $9 trillion balance sheet “in future meetings,” while Williams said the Fed should do so “on a regular and predictable basis,” beginning from the end of this year.
“Taken together, these two sets of measures — steadily increasing the federal funds rate target range and steadily reducing our holdings of securities — should help bring demand closer to supply,” he said.
Williams’ comments followed remarks by Chicago Fed Chairman Charles Evans, who said at the same Chicago Booth event that the current inflation situation warranted a “substantial repositioning of monetary policy.” But very restrictive interest rates might not be necessary, he added, which would mean “lower risk” to jobs and growth.