Two Fed Officials Stress Importance of Tackling High Inflation

(Bloomberg) -- Three Federal Reserve policymakers expressed confidence in the actions taken to bolster the financial system and stressed the need to curb high inflation despite concern over banking strains.

Echoing Chair Jerome Powell’s determination to restore price stability, the officials on Friday said this week’s interest-rate increase was clearly needed to rein in an economy running hotter than anticipated. St. Louis Fed President James Bullard also said that he now forecasts raising rates to 5.625% this year, which is 50 basis points more than the median projection of his colleagues.

“Inflation is high. Demand hadn’t seemed to come down. And so, the case for raising was pretty clear,” Richmond Fed President Thomas Barkin was quoted as saying in an interview with CNN.

Bullard and Atlanta Fed chief Raphael Bostic acknowledged the recent turmoil in the banking sector during remarks at separate events, but both spelled out that monetary policy should stay focused on lowering inflation.

“Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation,” Bullard said in St. Louis. 

“I just think this is a different world than the 2007 to 2009 world where you’re inventing things on the fly,” he said, adding: “Here you have the tools in the toolbox,” while the inflation problem “is real and is large.”

Policymakers lifted their benchmark rate by a quarter point on Wednesday, continuing their battle against stubbornly high inflation despite lingering uncertainty over how much the domestic economy will be upended following the second-biggest bank failure in US history.  

The move comes after the US government stepped in to guarantee deposits at two failed firms and after the Fed introduced a new emergency lending program meant to backstop other banks. The Fed also worked to boost international access to dollars by enhancing swap lines with its key central bank counterparts.

‘Little Bit Higher’

Bullard, who does not vote in monetary policy decisions this year, said he expects the financial stress to be contained and he raised his outlook for how high rates will need to go this year to 5.625%. 

“I had previously been at 5-3/8, now I’m at 5-5/8, so a little bit higher — 25 basis points higher — in reaction to the stronger economic news,” he told reporters via conference call Friday after a speech.

The Fed’s so-called “dot plot” of rate forecasts indicated that two other officials shared Bullard’s estimate of 5.625%, and one was higher at 5.875%.

Such forecasts are roughly 2 percentage points higher than where traders are betting Fed rates will be in January.

“There could a downside scenario where financial stress gets worse, but I didn’t make that my base case,” Bullard said, adding he thinks there is an 80% chance the turmoil will abate in the coming weeks and months.

In an interview earlier Friday with NPR News, Bostic said that the decision to raise interest rates by 25 basis points this week in the midst of a banking crisis was not taken lightly.

“There was a lot of debate, this wasn’t a straight-forward decision, but at the end of the day, what we decided was there’s clear signs that the banking system is sound and resilient,” Bostic said. “And with that as a backdrop, inflation is still too high.”

The rate increase brought the Fed’s benchmark rate to a target range of 4.75% to 5% and economic projections from Fed officials showed the median official sees rates rising to 5.1% by the end of this year. That would suggest at least one more quarter-point rate increase in 2022. 

Powell said during his post-meeting press conference Wednesday that the central bank could raise rates higher than expected if needed to quell inflation, but he also acknowledged that a sharp pullback in lending sparked by the banking turmoil would lessen the need for further rate increases.

The Fed chair said that the question of a pause had been considered in the days before the meeting, but during the gathering the consensus for an increase was strong. Powell also emphasized that the US banking system was “sound and resilient.”

Bostic said there had been an active debate on a pause at the meeting.

“Some were willing to say, ‘look, this uncertainty is really big, and we should wait,’ but I think, and I’m very comfortable with the idea that we didn’t see over the weekend before that meeting things getting worse. And that made me comfortable that we could manage through this.”

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