Fed Officials Float Even Higher Rates After Brisk Inflation Data

(Bloomberg) — Federal Reserve officials said interest rates may need to move to a higher level than anticipated to ensure inflation continues to fall, after fresh data showed prices rose at a brisk pace last month.

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Richmond Fed President Thomas Barkin, speaking in a Bloomberg TV interview Tuesday, said that “if inflation persists at levels well above our target, maybe we’ll have to do more.”

Dallas Fed President Lorie Logan said: “We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions.” She spoke at Prairie View A&M University in Texas.

They both commented shortly after data showed consumer prices climbed 6.4% in January from a year earlier, still far above the Fed’s goal for 2% annual inflation, which is based on a separate measure.

Philadelphia Fed President Patrick Harker, speaking later in the day, said the Fed still has more work to do to bring inflation under control. “At some point this year, I expect that the policy rate will be restrictive enough that we will hold rates in place and let monetary policy do its work,” he said, adding the Fed is “likely close” to that point. He didn’t directly address the fresh data in his prepared remarks.

The overall consumer price index climbed 0.5% from December, bolstered by gasoline and shelter costs. That was in line with economists’ expectations, but marked the biggest increase in three months.

“Inflation is normalizing but it’s coming down slowly,” Barkin told Bloomberg’s Jonathan Ferro and Michael McKee.

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While both Barkin and Logan participate in meetings of the Fed’s policy committee, Logan has a vote this year and Barkin does not.

Fed officials have been raising rates aggressively to try to cool inflation that hit a 40-year high last year. Officials in December penciled in a peak interest rate of about 5.1% this year, based on the median forecast.

At the start of February, they lifted their benchmark lending rate by a quarter of a percentage point to a range of 4.5% to 4.75%. That followed a half percentage-point increase at their December meeting, which came after four consecutive jumbo-sized 75-basis-point hikes.

Market Reaction

The S&P 500 Index fell and Treasury yields jumped following the latest inflation data. Investors now give near-even odds that Fed officials will raise rates by a quarter percentage point in June, following similar increases in March and May.

Expectations for where interest rates will peak have risen following stronger-than-expected jobs figures and continued signs of persistently high prices.

Economists at Barclays Plc and Monetary Policy Analytics now see the Fed lifting rates to a range of 5.25% and 5.5%. The higher forecast “reflects our view that the Fed will need to see material slowing in labor market outcomes to convince itself that wages are on course to return to rates of increase consistent with 2% inflation, and that such evidence will not be evident until midyear,” Barclays economists wrote in a note to clients.

Logan said Tuesday she sees two risks to monetary policy right now: doing too little and causing an inflation comeback and doing too much and creating excess pain in the labor market. The “most important” risk is doing too little, she said.

Policymakers have been particularly worried by increases in services prices, driven in part by a shortage of workers exacerbated by the Covid-19 pandemic.

Fed Chair Jerome Powell has cautioned that an easing in a too-tight labor market would be needed to cool continuing price pressures. Nonfarm payrolls increased 517,000 last month – more than twice the expectations of Wall Street – and the unemployment rate dropped to 3.4%, the lowest since May 1969.

There are some indications that economic growth could be more resilient than expected, or even accelerating. The Atlanta Fed’s tracker has put an early estimate of first-quarter gross domestic product growth at a 2.2% annualized rate, as of Feb. 8.

“You have seen demand moving very quickly” in some sectors, Barkin said Tuesday.

(Adds Harker comments, economist forecasts)

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