WASHINGTON, Nov 7 (Portal) – Federal Reserve policymakers, who decided last week to keep interest rates stable, are weighing strong economic data, some signs of a slowdown and the impact of higher long-term bond yields in considering whether to do so We will have to keep raising interest rates to reduce inflation.
U.S. economic growth in the third quarter, at an annual rate of 4.9%, was an “overwhelming” performance that “requires a very close eye as we think about future policy,” Fed Governor Christopher Waller said on Tuesday.
An ardent supporter of aggressive Fed rate hikes to combat high inflation, Waller made no policy recommendation in his remarks at a St. Louis Fed economic data seminar. His presentation also highlighted signs of a slowdown in job growth and what he called an “earthquake” caused by higher and potentially growth-dampening long-term bond yields.
But in comments to the Ohio Bankers League, Fed Governor Michelle Bowman said she viewed the latest GDP numbers as evidence that the economy has not only “remained strong” but may have picked up steam, requiring a higher Fed rate .
“I continue to expect that we will need to continue to increase the federal funds rate,” Bowman said.
At another event, Dallas Fed President Lorie Logan noted that “all of us” were surprised by the strength of the economy and that despite some progress, inflation was trending closer to 3% than the Fed’s 2% target. Despite the slowdown, the labor market remains “very tight,” she said, and longer-term bond yields, whose rise last week convinced her and others to keep rates unchanged, have fallen.
“We will need continued tight financial conditions to bring inflation to 2% in a timely and sustained manner,” Logan said, adding that she would keep both economic and financial conditions in mind at the Fed’s next meeting. December is approaching.
Explicit endorsements of higher interest rates have become rarer since July, when the Fed raised interest rates by a quarter point to the current range of 5.25% to 5.5%. Many analysts expect this to be the final step in a monetary tightening cycle that began in March 2022.
Indeed, recent data suggests that the outsized pace of growth in the July-September period may prove to be an outlier for the year, with both output and employment growth cooling in October, a survey of bank loan officers indicating a continued credit tightening and a Decline in credit demand in recent months shows and a report from the New York Fed on Tuesday that found a rise in consumer loan defaults.
This combination of data may show the kind of economic slowdown that Fed officials have been expecting as the sometimes slow effects of central banks’ rate hikes are felt more broadly.
Based on incoming economic data, the Atlanta Fed’s GDPNow model projects gross domestic product to grow at an annual rate of just 2.1% in the fourth quarter, moving toward a pace that Fed officials believe will continue to grow could allow inflation to slow to its 2% target.
According to the Fed’s preferred personal consumption expenditures price index, inflation was 3.4% in September.
“Clear reassurance”
Many economists expect the Fed to keep interest rates stable at the upcoming monetary policy meeting on December 12 and 13, in part due to the expected slowdown and continued tightening of borrowing and lending conditions.
In her comments on Monday, Fed Governor Lisa Cook particularly highlighted increasing debt stress. While this is not universally evident among “resilient” U.S. households, she said, “we are seeing increasing signs of stress among households with lower credit scores, and individual borrowers may struggle with debt burdens in the face of economic hardship,” a dynamic that supports this on the edge will begin to curb consumer spending and, in extreme cases, could lead to banks being even more reluctant to lend.
In comments to CNBC on Tuesday, Chicago Fed President Austan Goolsbee noted that inflation has slowed and that the rise in market-based interest rates, “if … sustained at high levels,” will most likely result in a tightening of credit for families and family-representing companies.
The yield on the 10-year Treasury note, which had risen about a full percentage point since July, was still about 75 basis points higher despite a decline since last week.
“We have to take that into account… We should expect this to take hold in the economy with a delay. “So we’re all paying attention and trying to figure out what the driver is,” Goolsbee said.
However, neither Goolsbee nor Minneapolis Fed President Neel Kashkari, who spoke to Bloomberg Television on Tuesday, ruled out further Fed rate hikes.
Kashkari, like Waller, noted the recent “hot” data on economic activity and said: “That makes me wonder whether policy is as restrictive as we currently think.”
“If inflation starts to rise again and real economic activity continues to be very strong, that would show me that we may need to do more,” Kashkari added.
Reporting by Howard Schneider and Lindsay Dunsmuir; Additional reporting by Michael Derby and Ann Saphir; Edited by Paul Simao and Andrea Ricci
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