The case for a half-point interest rate increase at the Federal Reserve’s next policy meeting in May has grown, according to Mary Daly, president of the US central bank’s San Francisco branch, in the latest sign that it is readying aggressive moves to root out high inflation.
Daly joins an expanding group of Fed officials who have jettisoned a gradual approach to scaling back support for the economy in the aftermath of the pandemic-induced recession. They have embraced a more rapid withdrawal as the labour market has bounded back and price pressures have become far-reaching.
Support has coalesced in recent weeks for interest rates to rise to a “neutral” level that neither aids nor constrains growth, and to get there more quickly than initially expected by moving in larger increments than the quarter-point rate increase delivered in March. That entails resurrecting a tool last used more than two decades ago and raising rates by half a percentage point at one or more meetings this year.
“The case for 50, barring any negative surprise between now and the next meeting, has grown,” said Daly in an interview with the Financial Times on Friday. “I’m more confident that taking these early adjustments would be appropriate.”
Estimating the neutral policy rate to be between 2.3 per cent and 2.5 per cent, and advocating for getting to that level “efficiently” this year, Daly acknowledged that that translates to “multiple” half-point adjustments given the target range of between 0.25 per cent and 0.50 per cent.
Following signals from some of the most senior policymakers on the Federal Open Market Committee in recent weeks — including Jay Powell, the chair — Wall Street economists have raised their forecasts for interest rates. They now expect the central bank to follow through with half-point moves in May and June before downshifting to quarter-point rate rises for the four remaining meetings after that.
Citigroup thinks the Fed could even go so far as to deliver half-point increases at its next four meetings, taking their cue from several officials who have endorsed moving rates above neutral this year. Most economists expect the Fed to begin shrinking its $9tn balance sheet next month.
Daly’s comments follow the release of another strong jobs report that showed 431,000 positions added in March and the unemployment rate dropping to the lowest level since before the pandemic, to 3.6 per cent.
Daly said the latest data fortifies the view that the labour market is “very strong” and “tight to an unsustainable level”.
“If you want a job in the United States, you can get one and you can probably get multiple jobs at this point,” she said. “If you’re an employer looking for workers, it’s hard to both hire them and retain them.”
While the combination of a labour market that has no “slack” and inflation that is running at the fastest pace in 40 years justifies moving towards neutral, Daly said the Fed would proceed carefully enough to avoid an “unforced error” that destabilises financial markets or the broader economy.
Fed officials so far appear confident in their ability to damp demand and tame inflation without causing widespread job losses or a recession. Powell spoke optimistically about achieving this soft landing at his most recent public appearance last month.
Daly acknowledged the economy may need to slow considerably in order to bring inflation back in line with the central bank’s 2 per cent target. But she drew a distinction to the 1970s, when then-chair Paul Volcker’s efforts to control surging prices and tether inflation expectations caused a sharp economic contraction.
“Our job really is to just bring demand and supply back into balance, and that’s an easier job than trying to reset the inflation anchor to something more consistent with price stability,” she said.
“I’m very optimistic that we can avoid a hard landing.”
Source: Financial Times