The case for a half-point rate hike at the next Federal Reserve meeting in May has grown, according to Mary Daly, President of the US Federal Reserve in San Francisco, in the latest sign that it is preparing aggressive moves to stamp out high inflation.
Daly joins a growing group of Fed officials who have jettisoned a phased approach to reducing support for the economy in the wake of the pandemic-induced recession. They have assumed a faster retreat as the labor market has rebounded and price pressures have become widespread.
Support has been building in recent weeks for interest rates to move to a “neutral” level, which neither supports nor slows growth, and getting there faster than originally expected, by moving in larger increments than the one rate hike that occurred in March quarter point can be moved. That means reviving an instrument last used more than two decades ago and raising interest rates by half a percentage point at one or more meetings this year.
“The case for 50 has grown, barring any negative surprises until the next meeting,” Daly said in an interview with the Financial Times on Friday. “I’m more confident it would be appropriate to make those early adjustments.”
Estimating the neutral policy rate at 2.3 percent to 2.5 percent, Daly advocated hitting that level “efficiently” this year, acknowledging that given the 0.25 percent target range, that would mean “multiple” adjustments half a point leads percent and 0.50 percent.
Following signals from some of the top policymakers on the Federal Open Market Committee in recent weeks – including Jay Powell, the chairman – Wall Street economists have raised their forecasts for interest rates. They now expect the central bank to continue with half-point hikes in May and June before switching back to quarter-point rate hikes for the four remaining meetings thereafter.
Citigroup believes the Fed could even go so far as to come up with a half-point hike at its next four meetings, taking inspiration from several officials who have advocated a above-neutral rate hike this year. Most economists expect the Fed to start shrinking its $9 trillion balance sheet next month.
Daly’s comments follow the release of another strong jobs report, which showed 431,000 new jobs were added in March and the unemployment rate fell to 3.6 percent, its lowest level since before the pandemic.
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Daly said the latest data reinforces the view that the labor market is “very strong” and “at unsustainable levels”.
“If you want a job in the United States, you can get one, and you can probably get multiple jobs at this point,” she said. “When you’re an employer looking for workers, it’s difficult to both hire and retain them.”
While the combination of a labor market showing no “weakness” and inflation running at its fastest pace in 40 years warrants a move toward neutral, Daly said the Fed will act cautiously enough to avoid an “unforced error.” ‘ that could destabilize financial markets or the broader economy.
Fed officials so far seem confident they can dampen demand and tame inflation without causing widespread job losses or a recession. Powell spoke optimistically about achieving that soft landing in his last public appearance last month.
Daly acknowledged that the economy may need to slow significantly to bring inflation back in line with the central bank’s 2 percent target. But it made a difference from the 1970s, when then-Chairman Paul Volcker’s efforts to control rising prices and curb inflationary expectations caused a sharp economic contraction.
“Our job is really to rebalance demand and supply, and that’s easier than trying to reset the inflation anchor to something more consistent with price stability,” she said.
“I am very optimistic that we can avoid a hard landing.”