Fed Officials Look At Higher Peak For Rates As Inflation Endures

(Bloomberg) -- Federal Reserve policymakers suggested that they’re prepared to raise interest rates higher than previously planned, though not necessarily at a faster pace, to defeat persistent high inflation.

Kansas City Fed President Esther George said Friday that officials should raise rates to a restrictive level while avoiding too much haste, which could “disrupt financial markets and the economy in a way that ultimately could be self-defeating.”

George, in a virtual speech to S&P Global Ratings, also said the peak of this tightening cycle may have to be higher. she said US households have savings that could help them keep spending, pointing to the Fed’s need to “keep at this” for a while. 

“You may see the terminal fed funds rate higher and have to stay there longer,” she said. “But I’m more cautious maybe than most about how quickly we do that.”

Officials in September saw rates reaching 4.4% this year from a current target range of 3% to 3.25% and rising to 4.6% in 2023, according to their median projection. Their next forecasts are due in December and if they the projections shift up again it will the latest upward revision to estimates for the peak of this tightening cycle as policymakers fight to control price pressures.

Separately, San Francisco Fed President Mary Daly said that while there are signs of a cooling economy, she’s “very supportive” of continuing to increase rates to restrictive levels.

Raising rates to between 4.5% and 5% “is the most likely outcome,” with the Fed then planning to “hold at that point for some period of time,” Daly said in a video interview with Yahoo! Finance.

The Fed is on track for a fourth consecutive 75 basis-point hike in interest rates in early November as central bankers seek to cool the hottest inflation in four decades. Investors also bet that another increase of that size is likely in December, with markets for the first time seeing rates approaching 5% next year, after disappointing inflation news.

Fed Governor Lisa Cook said later Friday that there’s a likely need for ongoing rate hikes and the Fed will continue until its job is done in controlling inflation.

The latest comments suggest that policymakers are reluctant to move any faster than in 75 basis-point increments, such as 100 basis points, as some traders and economists have speculated.

US core consumer prices, which strip out food and energy, rose 6.6% in September from a year ago, the highest level since 1982, according to a Labor Department report published on Thursday. That continues a worrying pattern for policymakers after the gauge accelerated in August as well.

Policymakers will get October and November consumer price readings before their Dec. 13-14 policy meeting.

If history is any guide, officials could forecast a higher terminal rate when they meet in December. A look at officials’ previous projections shows they have raised their expectations for how high they think rates will need to go with each update this year.

Six of the Fed’s 19 policymakers forecast the upper boundary of their target range for rates would reach 5% next year, according to estimates published in September. But in June, the highest projection called for a target range with an upper bound of 4.5% in 2023, and only one Fed official penciled that in. In March, the most hawkish officials saw rates reaching an upper bound of 3.75% next year. 

The evolution of the Fed’s “dot plot,” as its known, illustrates how much officials have ramped up their efforts in the wake of surprisingly strong inflation. And with no relief in sight, Fed watchers say the central bank is likely to keep making big moves. 

“They’re going to have to go a lot higher,” said Steven Blitz, chief US economist for TS Lombard, who sees them having to reach 5.5% to tame prices. “The trend that you see in terms of broad-based inflation is that it’s not decelerating.” 

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