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Fed Plans to Size Up Upcoming Rate Hike Depending on Inflation



producer prices - Shopping cart with inflation poster on a blurred background made of money | March Inflation Worse Than Ever At 8.5%, Beats February High | featured

Fresh inflation statistics due later this week will help Federal Reserve officials determine if they should lower the pace of interest rate rises at their forthcoming meeting to just a quarter-point increase instead of the greater leaps they utilized for most of 2022.

If Thursday’s consumer pricing data reflects the cooling observed in the most recent monthly jobs report, Atlanta Fed Bank President Raphael Bostic told reporters on Monday that a quarter-point rise would have to be taken “more seriously and moved in that direction.”

“Eventually I want us to get to 25” basis point rate hikes, Bostic said. “The specific timing of that is going to be a function of the data that comes in.”

In a Wall Street Journal article published early Monday, San Francisco Fed President Mary Daly stated that both 25 and 50 basis point rate rises are “on the table” for the January 31-February 1 meeting.

She, like Bostic, believes that the Fed policy rate, which is now at 4.25% to 4.5%, will need to be raised to 5% to 5.25% in order to combat inflation.

Reaching that via “gradual steps does give you the ability to respond to incoming information” and consider the delayed effect of higher borrowing costs on the broad economy, Daly noted.

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However, “I want to be data dependent, not wall off a 50 basis point increase,” she said, also mentioning that she will monitor any signs in this week’s consumer price index report for improvement in inflation’s most persistent: core services prices, excluding shelter.

After almost a year of strong rate rises aimed at slowing the economy and bringing skyrocketing inflation under control, Fed members say they are heartened by recent deceleration in job and pay growth, which might indicate lower inflation in the future.

They are, however, hesitant to halt interest rate rises or even move to lower rate-hike steps too soon, for fear of entrenching high inflation and ultimately compelling the Fed to raise rates even more.

Policymakers continue to discuss how high rates need to rise and how long they need to stay there to push inflation closer to the Fed’s 2% objective at upcoming meetings as they calibrate the number of their rate rises.

According to the minutes of the Fed’s most recent policy meeting in December, no officials anticipate decreasing rates this year. This is in contrast to market predictions that the Fed will begin decreasing rates in the year’s second half, presumably in reaction to a weakening economy.

On Monday, Bostic stated that his “base case” is for no rate decreases in 2024; however, this prediction is surrounded by large confidence bands.

That would place him among the most hawkish of the Fed’s 19 members, with the majority expecting policy rate reduction to below 4.5% next year.

Daly predicted that as the Fed tightens policy, the US unemployment rate, which is currently at 3.5%, would climb to about 4.5% or 4.6%, and inflation, which is currently at 5.5% by the Fed’s preferred gauge, will fall to the low 3% level by the end of 2023 and closer to 2% in 2024.

Getting inflation down quicker than that would need “enormous” labor market pain, which Daly is unwilling to impose.

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