Federal Reserve officials effectively pushed back against a narrative in financial markets over the past week that policy makers are envisioning a pivot away from tightening amid evidence of a turn in the economy.
Four Fed district-bank presidents highlighted in remarks on Tuesday that there was no sign yet of inflation easing. San Francisco Fed President Mary Daly said “we are still resolute and completely united” in the objective of getting inflation down around the 2% inflation target.
Remarks from Daly, Cleveland’s Loretta Mester and Chicago’s Charles Evans helped trigger a surge in Treasury yields Tuesday as traders reconsidered how much more the central bank will raise interest rates and whether it could move to cut them in early 2023. Yields had tumbled after Chair Jerome Powell said July 27 “it likely will become appropriate to slow the pace of increases” as the Fed’s stance tightens further.
Mester told the Washington Post during a live-streamed event she wants to see “very compelling evidence” that month-to-month price increases are moderating before she can say the US central bank’s tightening cycle is accomplishing its goal of curbing inflation.
Evans, speaking with reporters at his bank, said policy makers are “probably at least a couple of reports away” from seeing the kind of improvement in the inflation data that would reinforce the notion that they are on the right track with monetary tightening.
The central bank’s policy-setting Federal Open Market Committee raised its benchmark rate by three quarters of a percentage point last week for the second straight month, marking the most aggressive back-to-back increases in more than a generation to tame inflation.
Data since then have showed US gross domestic product contracted for the second consecutive quarter in the April-to-June period, meeting the threshold that some economists use as a rule of thumb to judge that the economy has fallen into a recession.
Powell told reporters after the July 27 decision that officials could increase rates by the same amount at the next meeting -- depending on readings from the economy between now and then -- though they would slow at some point in the future. The FOMC next gathers Sept. 20-21.
“I really am looking to see what those data tell us to see if we can downshift a little bit the pace of rate hikes, or if we need to continue” the outsize increases, Daly said Tuesday in an interview on LinkedIn.
Economists surveyed by Bloomberg before last week’s decision said they expected the FOMC to lift rates by a half point in September, then shift to quarter-point hikes at the remaining two meetings of the year. That would bring the upper range of the central bank’s policy target to 3.5% by the end of 2022, the highest level since early 2008.