WASHINGTON – The stubbornness of high inflation is dividing the Federal Reserve over how to manage interest rates in the coming months, leaving the outlook for the Fed's policies cloudier than at any time since it unleashed a streak of 10 straight rate hikes beginning in March 2022.
Many Fed watchers have expected the central bank's officials to forgo another increase in their benchmark rate when they next meet in mid-June. Yet recent warnings from several of the officials about the continuing threat from high inflation suggest that that outcome is far from certain.
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And on Thursday, Lorie Logan, president of the Federal Reserve Bank of Dallas, said she believes that the economic data so far doesn't support a pause in the central bank's rate hikes next month.
“The data in coming weeks could yet show that it is appropriate to skip a meeting,” Logan said in written remarks to the Texas Bankers Association. “As of today, though, we aren't there yet.”
On inflation, she said, “We haven't made the progress we need to make.”
No Fed officials have yet gone so far as to suggest that the Fed will likely cut rates this year. The financial markets, by contrast, have continued to bet that policymakers will feel compelled to cut interest rates twice by the end of 2023.
“They would like to go on hold and pause, but ... if need be, raising rates further is an option,” said Kathy Bostjancic, chief economist at Nationwide. “It comes down to the fact that inflation’s remaining so stubbornly high.”
Among Fed officials, though, that sentiment is hardly unanimous. Some have stressed the need to pause rate hikes for an extended period. The idea is to give the rate increases time to exert their full effects on growth and inflation. Behind that view is the concern that if the Fed keeps making borrowing costs ever-more expensive, it could cause a deep recession.
Greater clarity could arrive Friday, when Chair Jerome Powell is to speak at a Fed economics conference.
The Fed, in its most aggressive series of rate increases since the 1980s, has raised its key rate by a substantial 5 percentage points in the past 14 months. Those hikes have led mortgage rates to more than double and elevated the costs of auto loans, credit card borrowing and business loans. Home sales have plunged.
Most recent Fed speakers have suggested that the policymakers will keep rates unchanged this year and might even raise them further. On Tuesday, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, warned that the Fed was prepared to keep rates high to bring inflation back down to its 2% target, even if unemployment began rising steadily and critics accused the central bank of derailing the economy.
“We haven't gotten to the hard part yet,” Bostic said, speaking at a conference sponsored by the Atlanta Fed at Amelia Island in Florida. “There’s going to be tension and pressure and stress coming from a lot of different circles, and we are collectively going to have to ... be willing to be resolute and hold the course.”
A day earlier, Bostic told CNBC that “inflation is not going to come down very quickly” and that “if there’s going to be a bias toward action, for me it would be a bias to increase a little further as opposed to a cut.”
In April, inflation slipped to 4.9% compared with a year earlier from 5% in March — the 10th straight such decline and sharply down from a peak of 9.1% last June. Much of that drop, though, reflects slower increases or outright price drops in volatile items, like food and gas.
Measures of underlying inflation pressures, by contrast, have shown less improvement. Excluding food and energy prices, so-called core inflation eased to 5.5% in April from 5.6% in March and from a peak of 6.6% last September. But it hasn't fallen at all since January.
“Inflation is looking sticky in a lot of places, and that’s got to concern" the Fed, said Diane Swonk, chief economist at KPMG.
Also Thursday, Philip Jefferson, a member of the Fed's Board of Governors, sketched a fairly bleak outlook for inflation. One measure of prices that Powell is closely tracking — an index that covers services prices like restaurants, hotels and medical care but not energy or housing — has “been stubbornly high,” Jefferson noted, and “shows no signs of significant decline yet.”
But he also suggested that the Fed should take time to assess the impact that its policies have had so far.
“History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates,” Jefferson said in written remarks.
(Jefferson was nominated last week by President Joe Biden for the No. 2 position at the Fed, succeeding Lael Brainard, who became a top White House adviser.)
Other high-ranking Fed officials have taken a more sanguine view. John Williams, president of the New York Fed and a close adviser to Powell, suggested Tuesday that inflation has peaked and is “moving gradually in the right direction.”
For now, Williams said, the Fed needs to monitor forthcoming economic data to assess how its policies have affected the economy.
Austan Goolsbee, president of the Chicago Fed, held out hope Tuesday that the central bank could achieve what some analysts have called “immaculate disinflation." Under this scenario, the Fed's existing rate hikes would continue to slow inflation without an accompanying rise in unemployment or a recession.
Since the Fed began raising rates, the unemployment rate has actually dipped to 3.4%, matching the lowest level in 54 years. Typically, a sharp rise in borrowing costs would be expected to trigger layoffs and higher unemployment.
Goolsbee noted, though, that supply shortages helped accelerate inflation last year, even when the unemployment rate was still high, a scenario that defied textbook economics.
As a result, Goolsbee added hopefully, “the unraveling of that negative supply side component gives us some potential to have a soft landing,” which would also “definitely be unusual.”