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Officials of the U.S. Federal Reserve aired their differing views last week about when the Fed should raise interest rates or cut back its $120-billion-a-month bond-buying program.
The U.S. Federal Reserve will need to raise interest rates late in 2022, not in 2023 as bank officials determined at their meeting earlier this month, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said on 23 June in a National Public Radio interview.
“Given the upside surprise in recent data points, I pulled forward my projection,” he said.
The U.S. Federal Reserve now forecasts a 7-percent surge in the nation’s GDP this year and inflation is running far above the Fed’s 2-percent target rate, he noted.
While the bank had thought inflation might run hot for two or three months, the likelihood now is for its current pace to last six to nine months, he said.
Another “three or four months” of labor-market improvement should allow the Fed to consider beginning to curtail its $120 billion in monthly bond purchases, Bostic added.
In contrast, “it is not the time now,” to change course “because the economy is still far from maximum employment,” John Williams, president of the Federal Reserve Bank of New York, said in 24 June comments quoted by The Wall Street Journal.
Williams declined to predict the time when the central bank would raise interest rates, saying “it depends” on the speed and strength of the economy’s recovery.
“Once the recovery is complete and the economy’s in a very good place, we can take back the low interest rates and get them back to more normal levels,” he said.
The economy is recovering faster than expected, Williams acknowledged, and he reiterated the bank’s view that inflation’s current surge is temporary.
On 23 June, Michelle Bowman, one of the Fed’s seven governors, reiterated the Fed’s belief that inflation is being fueled by supply-chain disruptions that will fade. However, she did not say how long that would take.
Bowman was speaking at a Federal Reserve Bank of Cleveland conference.
Inflation will ease to slightly above 2 percent by the end of this year, Eric Rosengren, president of Boston’s Federal Reserve bank, has predicted.
In December, 12 of the Fed’s 18 governing officials thought rates would need to increase some time in 2024; earlier this month, seven thought the rate boost should come in 2023.
TRENDPOST: At his December 2020 press conference, Fed chair Jerome Powell pointed to “disinflationary pressures around the globe” and said “It’s not going to be easy to have inflation move up.”
A month later, Powell acknowledged that inflation was on the move but said any rise above the Fed’s 2-percent target rate would be “transient.”
On May 4, Janet Yellin made an offhand comment that president Joe Biden’s then $4.5-billion infrastructure plan could prompt the Fed to raise rates.
Her remarks sent the stock market tumbling, after which Yellin tried to mop up after herself, saying in a public statement that she was not recommending the Fed raise rates or trying to sway Fed policymakers at the Biden administration’s behest. If anyone “appreciates the independence of the Fed, that person is me,” she emphasized.
Now we see Fed officials quickly redialing their expectations for an interest rate increase from 2024 to 2023 to 2022.
The Fed should not wait even that long but should raise rates before this year ends, the Bank of America said in a research note this month. (See related story.)
Holding rates at their current rock-bottom levels “seems to me at the edge of absurd,” former treasury secretary Lawrence Summers said at Coindesk’s Consensus 2021 event last month.
“We used to have a Fed that reassured people that it would prevent inflation,” he said. “Now we have a Fed that reassures people that it won’t worry about inflation until it’s staggeringly self-evident.”
TREND FORECAST: Even if inflation stays above 3 percent by the end of this year, one point above their 2 percent limit, the Fed will resist raising rates when equities and the economy begin to weaken.