Top Fed official calls for two more interest rate increases

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The Federal Reserve will need to implement two more quarter-point rate rises this year to bring inflation under control, a top official at the US central bank said on Thursday.

In an intervention that pushed back against market pricing suggesting the Fed will conclude its monetary tightening after just one more increase, Christopher Waller backed a rise this month and another before the end of 2023.

Waller, a governor who is one of the most hawkish members of the central bank’s rate-setting committee, said he could push for a second increase in September or later this year depending on incoming economic data.

“If inflation does not continue to show progress and there are no suggestions of a significant slowdown in economic activity, then a second 25-basis-point hike should come sooner rather than later, but that decision is for the future,” he said an event hosted by New York University.

In the question-and-answer session that followed the event, Waller stressed that the Fed was not conducting policy in a “mechanical way” and that the September meeting was a “live” one. Two more encouraging inflation reports, like the one released this week, could suggest the need for stopping after the July move, he said.

His remarks will be one of the last public utterances from a Fed official before the “blackout” period ahead of the next two-day policy meeting starting on July 25.

The central bank is widely expected to resume its aggressive monetary tightening campaign later this month after forgoing an interest rate increase in June, lifting the benchmark rate to a new target range of 5.25-5.5 per cent.

Waller said a June rate rise would have been justified, but that forgoing an increase reflected “prudent risk management” at a time of uncertainty over the extent of the credit crunch stemming from the Fed’s existing tightening and the regional banking crisis earlier this year.

He was speaking following a string of better than expected economic data, which suggests that the most stubborn price pressures are starting to more noticeably fade.

The latest consumer price index report released on Wednesday indicated that “core” inflation, which strips out volatile food and energy prices, grew at a more subdued pace than expected, a trend that many economists reckon will continue in the coming months. Waller on Thursday said the data was “welcome news, but one data point does not make a trend”.

He added: “I am going to need to see this improvement sustained before I am confident that inflation has decelerated.”

Wall Street economists and traders are for the most part betting that the rate rise at the end of the month will be the last of this cycle.

In his speech, Waller pushed back on the idea floated by many of his colleagues that the net effect of the Fed’s tightening so far had yet to feed through fully to the economy.

In an interview with the Financial Times this week, John Williams, president of the New York Fed, said: “We are not getting the full effects of the restrictive policy that we put in place yet.”

But Waller said the “bulk of the effects from last year’s tightening have passed through the economy already”.

“To me, this means that the policy tightening we have conducted this year has been appropriate and also that more policy tightening will be needed to bring inflation back to our 2 per cent target,” he said.

Waller on Thursday lost an important hawkish ally after James Bullard said he would step down from his post as president of the St Louis Federal Reserve Bank to join Purdue university’s business school as its inaugural dean.

Bullard, who has been at the Fed for 33 years, established himself as an advocate for the US central bank to act aggressively to quell what has become one of the most acute inflation problems it has faced in decades.

He was among the first to urge the Fed to scale back its ultra-loose monetary policy in the aftermath of the pandemic and a vocal proponent of the central bank’s extended string of large interest rate increases last year.

As a voting member on the Federal Open Market Committee last year, Bullard periodically dissented on various policy decisions, most recently in March 2022, when he argued that the US central bank should raise rates by a half-point rather than the quarter-point it settled on.

He has recused himself from any monetary policy matters until his departure, including the upcoming meeting at the end of the month.

Kathleen O’Neill Paese, who served as first vice-president of the St Louis Fed will step in as interim president.