Feb 16 (Reuters) - Two Federal Reserve officials said on Thursday that more central bank rate rises are essential to help lower inflation back to desired levels.
The Fed “has come an appreciable way in bringing policy from a very accommodative stance to a restrictive one, but I believe we have more work to do,” Cleveland Fed President Loretta Mester said in a speech. “The incoming data have not changed my view that we will need to bring the fed funds rate above 5% and hold it there for some time" in a bid to get inflation back to the 2% target, she said.
When the Fed met at the start of the month to deliberate on interest rate policy, it moderated the pace of what had been a torrid barrage of rate hikes and lifted its overnight target rate by quarter percentage point, to between 4.5% and 4.75%. The Fed signaled more rate hikes are coming to help lower overly high inflation levels back to the 2% target.
But in the wake of that gathering, data showed unexpectedly strong January hiring that raised questions whether the labor market has slowed to the degree Fed officials believe is necessary. Meanwhile, on Tuesday the government's January consumer price index did not moderate as much as economists had forecast, keeping pressure on the central bank to act further.
Even before that data arrived, Mester, who does not have a vote on the Federal Open Market Committee this year, explained she thought her colleagues were not being aggressive enough with their most recent rate hike. "I saw a compelling economic case for a 50-basis-point increase, which would have brought the top of the target range to 5%,” she said.
Speaking to reporters after her formal remarks, Mester declined to say what she believes the Fed needs to do when it next meets on March 21-22. Futures markets are currently eyeing another quarter percentage point increase for that gathering and are split as to whether the federal funds rate range will hit 5% to 5.25% or the 5.25% to 5.5% range by June.
In December, officials penciled in a 5.1% stopping point for rate increases this year and will update those forecasts at the March meeting, very likely to a higher level.
"I certainly am not presupposing what the next rate move will be," Mester said, explaining that both the pace and ultimate destination of rate rises will be driven by how the inflation data comes in.
INFLATION TESTS POLICY OUTLOOK
Some other Fed officials have said in recent comments they are ok with smaller rate rises as they proceed toward an uncertain stopping point for the rate rise campaign. But some have also said it is possible the Fed may have to raise rates further and keep them there for longer if inflation does not start moving meaningfully toward the target.
In materials for a presentation on Thursday, St. Louis Fed leader James Bullard did not offer a view on what was next for monetary policy. But he noted that central bank action is important to ensure inflation pressures continue to abate.
"Inflation remains too high but has declined," Bullard said, adding "continued policy rate increases can help lock in a disinflationary trend during 2023, even with ongoing growth and strong labor markets." Bullard also does not vote this year on the FOMC.
Mester said it was good that inflation is moderating and she expects to fall further, but noted it still remains too high, and that the risks of upside surprises on the price pressure front are still very much in place. She also said the CPI data serves as a “a cautionary tale” for those who believed price pressures had peaked.
The Cleveland Fed policymaker reiterated that Fed actions aimed at lowering inflation "will not be without some pain," with growth retreating and the job market suffering smaller job gains and rising unemployment. But she doesn't expect the economy to fall into recession.
