Fed officials signal further rate hikes as inflation remains elevated

San Francisco Fed President Mary Daly said her “bias” was that the central bank would need to raise its policy rate, particularly because services inflation was moving in the wrong direction and showing signs of persistence.

“We’re going to need to, in all likelihood, raise rates; I will deliberate this with my colleagues in December at our meeting and in all future meetings and make the collective decision that we judge is most appropriate for the economy that is evolving,” Daly said at a University of Nevada, Las Vegas Center for Business and Economic Research forecast event.

The core Consumer Price Index, which excludes volatile food and energy prices, has risen about 0.3% month over month in each of the past three months. That is well above the monthly increase of 0.2% or less that would be consistent with the Fed’s 2% annual inflation target.

Daly said she was particularly concerned that services inflation excluding housing was “not moving in the correct direction,” as that category tends to be persistent.

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“That’s a place where you might think a retailer, or a professional business, if they have to buy more expensive IT goods, pay higher energy bills and have other inputs that are rising in price, might pass that along to customers,” she added.

The Fed raised its benchmark rate by a quarter percentage point in September before holding it at a range of 3.75% to 4% in October. Markets widely expect quarter-point increases at the Fed’s December 8-9 and January 26-27 meetings, although Governor Christopher Waller has raised the possibility of a half-point move in December.Daly did not comment specifically on the timing of future increases but said markets understood that the Fed adjusts rates in response to changing economic conditions.

She is also monitoring consumer spending closely ahead of the December meeting.

Collins sees tighter policy ahead

Boston Fed President Susan Collins also said further tightening was needed because inflation remained high, suggesting that rates may have to rise more than she previously expected.

“I think it’s clear the direction that monetary policy needs to go and I would think that soon some additional firming, tightening of policy is appropriate,” Collins said in an interview with Bloomberg Television.

Recent inflation data have been unfavourable and indicate that price pressures are spreading across the economy, Collins said. “I think it may be that a bit of a tighter policy path than I had pencilled in a couple of months ago might be appropriate.”

Collins declined to specify how quickly rates should rise or how high they should go.

“I don’t want to get ahead in terms of how high we should go or how fast,” Collins said, adding that her “best-case scenario” is for “a careful adjustment of policy.” She acknowledged, however, that “there are scenarios where I might think about that somewhat differently.”

Speaking while attending a housing conference hosted by the Boston Fed, Collins said restoring price stability was essential to a healthy housing sector, even if tighter policy caused some near-term pain. She also said financial markets appeared to be functioning well.

Logan calls for stronger market-support tools

Dallas Fed President Lorie Logan said inflation was too high and monetary policy needed to become more restrictive. Earlier in the week, she argued for at least two additional quarter-point rate increases, potentially in quick succession.

Logan also said the US Treasury market was functioning “very well” despite bouts of interest-rate volatility and that banks had improved their access to emergency funding over the past three years.

However, she called on the Fed to strengthen its tools for supporting Treasury-market functioning and providing liquidity to banks without working against monetary policy.

“Especially in an economic environment where tighter policy appears necessary, I believe it is prudent for the FOMC (Federal Open Market Committee) to strengthen its tools for supporting market functioning without providing unnecessary economic stimulus,” Logan said at a Dallas Fed conference on bank funding.

Logan, a former head of open-market operations at the New York Fed, said no intervention was currently needed. She warned, however, that intervening during a monetary-policy tightening cycle could complicate the Fed’s communications.

“Historically, the Fed’s interventions to support market functioning have come at times when the FOMC also wanted to stimulate economic activity,” she said. “The same asset purchases could serve two purposes: providing monetary policy accommodation and supporting market liquidity.”

“If Treasury market dysfunction emerged now, the FOMC would not have the luxury of using the same asset purchases to accomplish two goals,” Logan said.

Logan further said that the banks had improved their access to contingent funding, which provides liquidity during periods of market stress, but should continue preparing to use facilities such as the Fed’s discount window.

As services such as FedNow and private-sector payment systems expand, banks could face liquidity needs during weekends and holidays. With the Fed planning to extend its Fedwire Funds wholesale payment system to Sundays and weekday holidays, Logan said discount-window operations should also be expanded.

“This is not a change any one Reserve Bank can make on its own,” she said. “I look forward to discussions with my colleagues about this possibility.”

Logan also urged the Fed to develop the ability to centrally clear its repurchase, or repo, operations. “This would reduce the balance sheet costs of intermediation,” she said. “Funding from the Fed could then flow more efficiently to the broad market.”

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)