Feb 14 (Reuters) - The Federal Reserve will need to keep gradually raising interest rates to beat inflation, two U.S. central bank officials said on Tuesday, as they put investors on notice that borrowing costs may ultimately need to go higher than is now widely expected.
"We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions," Dallas Fed President Lorie Logan said in a speech at Prairie View A&M University in Texas.
The Fed's policy rate is currently in a 4.50%-4.75% target range. A key U.S. government report earlier on Tuesday showed consumer prices on a monthly basis accelerated in January, though the annual increase continued to slowly abate.
Neither Logan nor Richmond Fed President Thomas Barkin, who spoke in an interview on Tuesday, took any firm signal from the Consumer Price Index (CPI) report, instead noting that overall price pressures remain elevated.
"It's about as expected," Barkin told Bloomberg TV when asked about the latest CPI data, cautioning that it will take a while for inflation to get back down to near the Fed's 2% goal. By the Fed's preferred measure, inflation is still running at a 5.0% annual rate.
"Inflation is normalizing but it's coming down slowly," Barkin said. "I just think there's gonna be a lot more inertia, a lot more persistence to inflation than maybe we'd all want."
'SELF-FULFILLING SPIRAL'
The Fed last year lifted interest rates further and faster than any time since the 1980s to fight inflation and policymakers signaled they expected the benchmark overnight interest rate would need to go to at least 5.1% before policy would be "sufficiently restrictive" to ease price pressures.
However, following the CPI release on Tuesday, traders of interest rate futures now see the Fed raising borrowing costs three more times, bringing the policy rate to the 5.25%-5.50% range by July, if not June. That's up from only about even odds for rates to get that high as of early on Tuesday.
Logan continued to point to some upside risk to her forecast. "Even after we have enough evidence that we don't need to raise rates at some future meeting, we'll need to remain flexible and tighten further if changes in the economic outlook or financial conditions call for it."
Key to that, Logan said, will be substantial further slowing in wage growth and better "balance" in what is now an "incredibly strong" labor market. The unemployment rate fell in January to 3.4%, the lowest since 1969.
While there has been progress on inflation, with a moderation particularly in goods prices and more recently in housing, she said, more is needed, especially for prices of core services excluding housing. Without improvement there, Logan said, inflation could land at 3%, above the Fed's target.
"The most important risk I see is that if we tighten too little, the economy will remain overheated and we will fail to keep inflation in check," Logan said. "That could trigger a self-fulfilling spiral of unanchored inflation expectations that would be very costly to stop."
There are also risks, she said, of going too far and weakening the labor market more than necessary in pursuit of slowing inflation.
"My own view is that, given the risks, we shouldn't lock in on a peak interest rate or a precise path of rates," she said.
Asked if it was still the case that the U.S. central bank risked doing too little rather than too much, Barkin also erred on the need to quash inflation as the priority, although he added that incoming data would guide the Fed.
"It feels to me like the risk is on the inflation side at this point rather than the economy side, Barkin said. "If inflation settles, maybe we don't go quite as far, but if inflation persists at levels far above our target then maybe we'll have to do more."
