Federal Reserve officials said they needed to keep raising interest rates to restore price stability, with St. Louis Fed chief James Bullard warning that their credibility was on the line.
“This is a serious problem and we need to be sure we respond to it appropriately,” Bullard told an economic conference in London Tuesday. “We have increased the policy rate substantially this year and more increases are indicated,” in the Fed’s latest forecasts.
His commitment to reducing inflation to the Fed’s 2% target was broadly echoed by Chicago Fed chief Charles Evans and Neel Kashkari of Minneapolis, who said the central bank should deliver on the rate increases they have forecast and then hold them there to bring price pressures to heel.
Their remarks maintain Chair Jerome Powell’s message last week that they will not flinch from confronting inflation despite pain for the US economy -- a hawkish stance that’s roiled financial markets and contributed to a steep rise in bond yields.
Fed officials raised interest rates by 75 basis points on Sept. 21 for the third straight meeting, bringing the target for the benchmark federal funds rate to a range of 3% to 3.25%. Median projections show officials forecast that rates would reach 4.4% by the end of this year and 4.6% in 2023, a more hawkish shift in their so-called dot plot than anticipated.
Interest rates may need to move to “the 4.5% range,” or about 1 percentage point higher than his projection in April, the St. Louis Fed official said, citing the latest policy committee forecasts as well as a recommended policy rate from an adapted version of the Taylor Rule, a guideline developed by Stanford University’s John Taylor.
“We have just now gotten to the point where we can argue we are in restrictive territory,” Bullard said. Referring to the rate path laid out in the Fed’s dot plot, he said “I think we need to stay at that higher rate for some time to make sure we’ve got the inflation problem under control.”
Fed officials signaled they expect another 1.25 percentage points of increases over the final two policy meetings of the year in November and December, according to the median of their projections. Investors currently expect a fourth straight increase of 75 basis points at the Nov. 1-2 meeting, according to prices of futures contracts.
Bullard said the US faces recession risks. But he played down the degree of the threat signaled in financial markets by the inverted shape of the yield curve -- with shorter-dated securities yielding more than longer-dated ones.
“You would expect the yield curve to be inverted based on the nominal outlook, and not necessarily based on the prediction of a recession,” he said. “It is encouraging that the inflation expectations are in the right place.”