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The U.S. Federal Reserve is all but certain to raise its key interest rate by a half-point this month and again in July, but it may need to continue that pace further into the year to bring inflation under some kind of control, Fed vice-chair Lael Brainard said in a 2 June CNBC interview.
“If we don’t see…deceleration in monthly inflation” and “if we don’t see some of that really hot [consumer] demand starting to cool, then it might be appropriate to…proceed at the same pace,” she said.
However, “if we are seeing deceleration…it might make sense to be proceeding at a slightly slower pace,” she added.
So far this year, the Fed has raised rates twice, including the first half-point hike in 22 years, despite inflation running at four times the Fed’s announced 2-percent target rate.
Most Fed officials speaking publicly, including Brainard, have supported back-to-back half-point rate hikes this month and next; markets have already priced them in.
After July, the Fed’s next meeting, and the next chance to boost rates, will come in September.
“Right now, it’s hard to see the case for a pause” in lifting interest rates, Brainard said. “We’ve still got a lot of work to do to get inflation down to our 2-percent target.”
In addition to raising rates, the central bank has ended its $120-billion monthly bond-buying campaign and is letting bonds fall out of its portfolio as they mature.
Late last month, president Joe Biden expressed confidence in the Fed’s ability to tackle inflation. His comments have been interpreted as a tacit endorsement of the Fed’s plan to steadily raise interest rates in the months ahead.
Some economists have expressed fears that the Fed will boost rates so high so quickly that the economy will cast off jobs and tip into recession.
Fed officials insist that outcome is unlikely because the U.S. job market is so strong now.
TREND FORECAST: The Fed’s plan to bring interest rates to, or close to, 3 percent by the end of this year is a guessing game. And considering the rate of inflation, higher rates will bring the economy and equity markets down, but in the short term do little to slow the inflation rate.
For example, in Argentina, where inflation zoomed to 51 percent in February, the Central Bank of the Argentine Republic boosted its key rate to 44.5 percent, as we detailed in “Argentina’s Interest Rate Spike. What’s Next?” (22 Feb 2022).
Factoring in the benefits of compound interest, the higher rate lifted investment returns above the rate of inflation, intended to give investors in peso-denominated investments a positive return and cap inflation.
If the Fed were to follow suit and set its key interest rate at one percent above inflation’s pace, as Argentina did and the IMF requires, the Fed’s base rate would be at least 9 percent since inflation in the U.S. is running above 8 percent.
At its current pace, it would take the Fed more than two years to reach that level and, meanwhile, the economy would almost certainly dive into a recession.