Federal Reserve officials are discussing a third aggressive interest rate hike, with the major debate being just how large.
Members of the Federal Open Market Committee are indicating that there is not a consensus yet on what they will do at the September meeting regarding the central bank’s interest rate target. At the last two meetings, Fed officials decided to hike rates by three-quarters of a percentage point — essentially jacking up rates six times in conventional terms.
One Fed official, Federal Reserve Bank of St. Louis President James Bullard, told the Wall Street Journal that he is leaning toward supporting another massive 75 basis point hike at next month’s meeting. He noted that inflation is still magnitudes higher than the Fed’s preferred 2% threshold — it was 6.8% in June, as measured by the personal consumption expenditures price index.
“We should continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation,” and “I don’t really see why you want to drag out interest rate increases into next year,” he said.
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Meanwhile, Federal Reserve Bank of Kansas City President Esther George is taking a bit of a more wait-and-see approach. George was the sole dissenter at the June meeting, preferring a 50 basis point hike (although she later backed the 75 basis point hike in July).
On Thursday, she appeared to be a bit more cautious about endorsing the more aggressive rate hike come September.
“I think the case for continuing to raise rates remains strong. The question of how fast that has to happen is something my colleagues and I will continue to debate, but I think the direction is pretty clear,” she said, according to Bloomberg. “We have done a lot, and I think we have to be very mindful that our policy decisions often operate on a lag. We have to watch carefully how that’s coming through.”
San Francisco Fed President Mary Daly said it would be “reasonable” to raise rates by either 50 or 75 basis points after next month’s two-day meeting.
“The job market is strong, inflation is too high,” Daly said, “and the Federal Reserve is committed to using its tools to bring the economy back to a sustainable path where people don’t have to wake up every morning worrying about whether their real wages are eroding.”
Daly predicted that the Fed would continue with rate increases into next year, something that she said investors may not be pleased with but must be done to tame inflation.
Daly said that driving up rates rapidly and then suddenly having them come down would introduce a lot of uncertainty for consumers and businesses. She told CNN that a raise-and-hold strategy would be best, rather than aggressive cuts next year.
Investors are now pegging the odds of a three-quarters hike at just over 44% and pricing in about a 56% chance of a 50 basis point hike, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices.
The strong July jobs report bolsters arguments that a more aggressive increase is warranted, as it shows that the labor market has been able to withstand the burden of the big hikes.
The economy added 528,000 jobs in July. The unemployment rate also unexpectedly fell to 3.5%, matching the ultra-low level it was at prior to the pandemic.
The most recent consumer price index numbers showed that inflation didn’t increase from June to July, although it is still an explosive 8.5% higher than a year ago. The reading was better than many economists had anticipated, although still high.
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Also, there are other reports, including the August jobs and inflation reports, that are set to be released before the September meeting, meaning that the situation could change based on those.
The FOMC is set to meet on Sept. 20-21.
