Fed officials are considering whether interest rates are high enough as inflation expectations jump

Written by Anne Safire and Howard Schneider

NEW ORLEANS (Reuters) – The debate over whether U.S. interest rates are high enough deepened among Federal Reserve officials this week, and may escalate after a major survey showed a jump in consumer inflation expectations.

“There are important upside risks related to inflation in my mind, and I think there are also doubts about how restrictive policy will be and whether it is restrictive enough” to bring inflation back to the U.S. central bank’s 2% target, Dallas Fed President Lurie said. Logan said at a Louisiana Bankers Association conference in New Orleans.

“I think it’s too early to think about cutting interest rates… I think I need to see a resolution to some of these uncertainties about the path we’re going on, and we need to remain very flexible,” Lujan said, though she did so. She did not directly address whether she feels the Fed may need to raise its benchmark interest rate again from the 5.25% to 5.50% range it has maintained since July.

Appearing on CNBC, Minneapolis Fed President Neel Kashkari said it was in a “wait-and-see mode” regarding what’s next for central bank policy, and the Fed could stay at current rates “as long as needed” to lower inflation. . But he added that there was a “high” bar to concluding that interest rate hikes were needed to cool inflation.

Several US central bank officials, including Federal Reserve Chairman Jerome Powell, said they still believe further rate hikes would be unnecessary.

In an interview with Reuters, Atlanta Fed President Rafael Bostic said he still believes inflation is likely to slow under current monetary policy and allow the central bank to start cutting interest rates in 2024 – although perhaps by a quarter of a percentage point. Only and not until the last months of the year.

“I still have that belief,” Bostic said in the interview on Thursday, although “it will take some time” to be sure that inflation will decline.

But the outlook is in flux after three months in which inflation has stopped improving.

Data released on Friday provided another jolt in the wrong direction. Inflation expectations for next year rose in the University of Michigan Consumer Confidence Survey from 3.2% to 3.5% in May, the highest level since November, and longer-term expectations rose as well.

While the one-month reversal may not be significant, if it persists it would challenge the Fed’s current assessment that expectations are “well-established” — and add to arguments made by Logan and others that interest rates may not be high enough to end the inflation battle.

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Fed officials view the firmer forecasts as an important sign of the central bank’s credibility, and to help bring inflation back to 2%.

“Walking a tightrope”

Chicago Fed President Austan Goolsbee, in an appearance at the Economic Club of Minnesota, said the upward drift in inflation expectations “bodes ill” for further progress in inflation, but the immediate results were not a concern.

“There’s not a lot of evidence that inflation is stopping,” Goolsby said, adding that he considered current policy to be “relatively restrictive.”

The University of Michigan’s statements were published after Logan began her statements, but did not address them.

The survey also showed a general decline in consumer sentiment, a confusing signal that may indicate lower consumer spending in the coming months even as households expect higher inflation.

“The Fed is walking a tightrope as it balances its price stability mandate with growth,” wrote Jeffrey Roach, chief economist at LPL Financial. “Although this is not our base case, we see increasing risks of stagflation,” where growth slows and price increases remain strong.

The Fed’s preferred measure of inflation, the personal consumption expenditures price index, rose at an annual rate of 2.7% in March, with little progress showing in the first three months of the year.

In an article published earlier this week, Kashkari also raised the possibility that interest rates may not be sufficiently restrictive, given the continued strength of the US economy, especially the housing market.

“It is difficult for me to explain the strong economic activity that has continued,” Kashkari said. “It raises questions about how restrictive the policy really is.”

In contrast, San Francisco Federal Reserve Bank President Mary Daly said in a recorded interview on Thursday that it is possible that the US “neutral” interest rate has risen slightly, implying that any given level of the benchmark interest rate will depend on… Less on economics. activity than if it were otherwise.

But she said that the solution for the Fed in this case is to maintain the interest rate at the current level for a longer period.

Even if the neutral rate were higher, “we still have a restrictive policy, which is what we want,” Daly said. “But it may take more time…to bring down inflation.”

(Reporting by Anne Safire in New Orleans, Howard Schneider in Washington and Michael S. Derby in New York; Editing by Chizuo Nomiyama and Paul Simao)