Two Federal Reserve officials have spoken of the need for bigger interest rate increases in order to combat rising inflation, which is already at record highs and threatening both the economy and labor market.
Cleveland Federal Reserve Bank President Loretta Mester said that she would like to see interest rates up to around 2.5% by the end of the year, with further increases next year to bring inflation down from its current position and break the trend of rising levels.
“Given the underlying strength in the economy and the current very low level of the funds rate, I find it appealing to front-load some of the needed increases earlier rather than later in the process because it puts policy in a better position to adjust if the economy evolves differently than expected,” said Mester. “If by the middle of the year, inflation is not beginning to moderate, we could speed up our rate increases. But if inflation is moving down faster than expected, we could slow the pace of rate increases in the second half of the year compared to the first half”.
Inflation is already at its highest levels since the 1980s, approximately three times higher than the Fed’s 2% target, and Mester warned that the situation would continue to worsen without drastic measures.
“With inflation already at very high levels and demand outstripping supply, there are rising risks that too-high inflation will become embedded in the economy and persist,” she added.
St. Louis Fed President James Bullard believes the central bank needs to go further, and is calling for a 3% rise before the end of the year. Bullard was the lone dissenting voice last month in calling for more than the 0.25% rate increase implemented by the bank.
“The Fed needs to move aggressively to keep inflation under control,” Bullard told Bloomberg news, adding that “faster is better”.
The comments from the two official back up those from Fed Chair Jerome Powell, who said yesterday that the bank must move “expeditiously” in raising rates, adding that there was nothing stopping a rate rise of half a percentage point at the next policy meeting in May.
“There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level,” said Powell speaking at the Annual Economic Policy Conference of the National Association for Business Economics.