Some Federal Reserve officials are beginning to push back on the notion that the central bank will pause its historic rate hiking cycle this year.
Most investors are anticipating that the Fed’s last rate hike, which came earlier this month, will be its last. But two presidents of regional Fed banks on Monday emphasized that a pause isn’t yet a foregone conclusion.
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Federal Reserve Bank of St. Louis President James Bullard said at an event on Monday that he thinks there need to be another two rate revisions this year, even as investors bet that the central bank will pause and actually slash rates by year’s end. The Fed has been incrementally raising rates for over a year in order to quell the country’s too-high inflation.
“I think we’re going to have to grind higher with the policy rate in order to put enough downward pressure on inflation and to return inflation to target in a timely manner,” he said during a moderated discussion.
“I’m thinking two more moves this year — exactly where those would be this year, I don’t know — but I’ve often advocated sooner rather than later,” he added.
Bullard is not among those who vote on monetary policy, although he has been one of the most hawkish Fed officials as the country moved out of the pandemic. In an unprecedented step, the United States had slashed rates to near-zero levels for some two years to keep the economy above water.
Also Monday, one of the voting members of the Fed’s monetary policy committee weighed in on a potential pause.
Minneapolis Fed President Neel Kashkari cautioned that, even if the Fed holds off on hiking following its next meeting in June, investors shouldn’t assume that rates won’t go higher at subsequent meetings.
“Right now, it’s a close call either way versus raising another time in June or skipping,” Kashkari said during an appearance on CNBC. “Some of my colleagues have talked about skipping. Important to me is not signaling that we’re done. If we did, if we were to skip in June, that does not mean we’re done with our tightening cycle. It means to me we’re getting more information.”
If the central bank doesn’t raise rates enough, inflation could remain too high and continue to wreak havoc on consumers, many of whom have had to stretch their paychecks. But if the Fed tightens too much, it could plunge the economy into a recession and cause mass job loss.
Kashkari’s comments speak to the sensitivity of the economy to rate hikes and the caution the central bank is exercising against the backdrop of a potential recession.
Inflation has been meaningfully declining, although it is still much higher than is healthy. The Fed targets a 2% rate of inflation.
Inflation, as measured by the closely watched consumer price index, cooled slightly to 4.9% for the year ending in April, the Bureau of Labor Statistics reported. The new report marks 10 straight months of declines in annual inflation after the rate peaked at a whopping 9.1% in June.
Because inflation has been falling, and because of ongoing uncertainty in the banking sector following the collapse of Silicon Valley Bank, many investors are expecting the Fed to discontinue rate hikes. A notable contingent was even calling on the Fed not to raise rates again at its last meeting, although officials still went ahead with a modest quarter percentage point increase.
And most investors are betting that the Fed will pause at its next meeting. Still, after the comments from Bullard and Kashkari, an increasing number are starting to price in the possibility of another hike.
As of Friday, investors assign about a 74% chance that the Fed will pause rate hiking, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed. Just over 1 in 4 think the Fed will hike again.
That is a notable increase from even just a day ago when some 83% of investors were predicting a pause.
Still, not all Fed officials are thinking the same way about future rate revisions.
Federal Reserve Bank of Atlanta President Raphael Bostic, who is an alternate member of the Fed’s monetary policy committee, said rates should be held steady at 5% to 5.25% to assess the economic landscape better.
“Our policy works with a lag. And we’re just at the very beginning of this time when that lag is starting to play out, and you’re starting to see tightness emerge,” Bostic said Monday, according to CNBC. “Right now, absent a big change, I think I will be comfortable saying let’s just look and see how things play out.”
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Meanwhile, Richmond Fed President Thomas Barkin, also an alternate, said he wanted to wait and see about a rate decision next month.
“I’m not going to prejudge June,” he said on Monday.
