Fed policymakers are behind two more big rate hikes, but then what?

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ATLANTA / SAN FRANCISCO – U.S. central bankers have broadly backed two more major interest rate hikes in June and July, but what happens next is the subject of intense internal debate over what will be the effect of price pressures in the coming months. .

To the Atlanta Fed President Rafael Bostick, the Federal Reserve once offered a half-percentage point rate increase because Chair Jerome Powell indicated, “The break in September could make sense.”

“I think it depends a lot on the ground dynamics we’re starting to see,” he told the Rotary Club of Atlanta on Monday, both in terms of the Fed’s efforts to contain inflation and the impact of high interest rates on the economy.

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While there is a risk that the central bank may become more aggressive, he said, “I am an optimist and I assume inflation will definitely start to continue.”

Speaking at a separate event later in the day, Kansas City Fed President Ether George painted a more bleak picture, citing a number of factors, including Russia’s war in Ukraine and China’s COVID-19 lockdown, that could intensify or ease inflationary pressures.

Adding to that, he said, the epidemic has changed the U.S. economy in so many ways that it has limited labor supplies beyond what was praised and a service economy that has struggled to regain capacity after massive cuts early in the crisis. .

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Complicating matters, the Fed will begin cutting its $ 9 trillion balance sheet next month, adding to the tightening of policy in a market background that makes the Fed much more volatile in its bond portfolio now than it was last time.

“The road ahead can be rough,” he said.

The challenge for the Fed is to tighten enough policies to stem inflation, which has reached a 40-year high, but not so much that it has plunged the economy into recession.

Both policymakers have set their sights on the hard work ahead, amid growing concerns about how the US economy will be resilient to rising rates and falling equity prices amid a global slowdown and other adjustments.

Investors expect the Fed to continue raising rates this year, keeping the federal funds rate between 2.75 and 3% by the end of the year.

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Some of their colleagues have called for an aggressive push to get the policy rate at 3.5% by the end of the year, which would include a half-point increase in all other Fed meetings. Others say they expect the Fed to rise to a smaller rate after July.

Bostick says he expects a shallow move by the end of 2022 with funding ending in the range of 2 to 2.5%.

The economy’s response to the high rate is “going to accelerate over the next few months,” Bostick said. “If we don’t stay in it, there is a risk that we will move beyond the point where these markets have found a balance.”

George did not like a certain rate-hike-path. (Reporting by Howard Snyder and Ann Sapphire; Editing by Kim Kogel)