Fed Officials Plan for Higher Rates as Inflation Threat Persists

President and CEO of the Federal Reserve Bank of Atlanta Raphael W. Bostic speaks at a European Financial Forum event in Dublin on Feb. 13, 2019. (Clodagh Kilcoyne/Reuters)

The message was loud and clear from multiple Federal Reserve officials: Interest rates will stay higher this year, the benchmark rate might increase, and it’s unlikely there will be any rate cuts this year.

Inflation is still plaguing monetary policymakers, and restoring price stability, even in the face of a recession, is the chief priority for the U.S. central bank.

Since March 2022, the federal funds rate has been raised by 500 basis points, to its highest level since late 2007.

Inflation Is the Top Job

Atlanta Fed Bank President Raphael Bostic said he doesn’t foresee any rate cuts “until well into 2024,” even if the U.S. economy slips into a recession.

Returning inflation to the Fed’s 2 percent target rate “is job No. 1,” he says.

“If there’s going to be some cost to that, we’ve got to be willing to do that,” he told CNBC on May 15 during the regional institution’s Financial Markets Conference.

Because of persistently high inflation, resilient consumer spending levels, and tight labor markets, “there’s still going to be upward pressure on prices,” Bostic said.

“If there’s going to be a bias to action, for me, it would be a bias to increase a little further as opposed to cut,” he said. “There’s still a lot of confidence that our policies are going to be able to get inflation back down to our 2% target. And to be fully clear, we’re going to do all that we need to make sure that that happens.”

In April, the annual consumer price index eased below 5 percent for the first time in two years. In addition, the personal consumption expenditure (PCE) price index, the Fed’s preferred inflation gauge, slowed to 4.2 percent, the lowest since May 2021.

Although the financial markets are mostly expecting a rate pause at the Federal Open Market Committee (FOMC) policy meeting in June, there is a growing expectation that the Fed will start to slash interest rates toward the end of the year, according to the CME FedWatch Tool.

Won’t Get Fooled Again

Minneapolis Fed Bank President Neel Kashkari said he wouldn’t be satisfied with a few months of positive data.

In comments at the Minnesota Transportation Conference and Expo on May 15, he said that the central bank has “more work to do” to ensure the inflation rate returns to its 2 percent target.

Minneapolis Fed President Neel Kashkari during an interview at Reuters in New York on Feb. 17, 2016. (Brendan McDermid/Reuters)

“We need to finish the job,” he said, adding that the Fed needs to do so “in an orderly manner,” without leading to a deep recession.

He also said at a Northern Michigan University event on May 11 that he’s concentrating on the connection between inflation, interest rates, and the effects these have on the banking system. He also conceded that the inflation outlook creates consternation.

“We’ve been surprised how persistent it has been. It is coming down, but so far it’s been pretty persistent,” he said. “The real question is when inflation is going to come down.”

Recent reports suggest that inflation outlooks among consumers have been sticky.

The University of Michigan’s one-year inflation expectations came in at 4.5 percent in May, down from 4.6 percent in April. However, the five-year inflation outlook rose to 3.2 percent, from 3 percent a month earlier.

The Fed Bank of New York’s one-year horizon consumer inflation expectations slipped in April to 4.4 percent, from 4.7 percent, according to the Survey of Consumer Expectations. The three- and five-year inflation expectations edged up to 2.9 percent and 2.6 percent, respectively.

Not Yet Convinced

Despite 10 straight months of slowing inflation, Richmond Fed Bank President Thomas Barkin is still determining whether price pressures are steadily declining. As a result, he said he is open to either an 11th straight rate increase or leaving the benchmark fed funds rate at a range of 5–5.25 percent.

For now, officials must assess the data as credit card spending is flat, the labor market remains tight, the banking sector faces significant stress, and financial markets monitor the debt ceiling standoff.

According to the Richmond Fed Bank chief, the employment situation has “moved from red hot to hot,” adding that there is “enduring inflation.”

“You could tell yourself a story where inflation comes down relatively quickly ... with only a modest economic slowdown,” he told Reuters during a conference in Florida on May 15. “I’m not yet convinced ... I do wonder whether we’re not going to need more impact on demand to bring inflation down to where we need to go.”

He also told the Financial Times that if inflation persists or accelerates, he thinks “there’s no barrier ... to further increases in rates.”

Ultimately, Barkin won’t make his final decision until closer to the June 13–14 FOMC meeting.

One inflation metric that Fed officials, especially Chair Jerome Powell, are paying close attention to is core PCE services ex-housing. This measurement, which the central bank considers the most accurate picture of underlying inflation in the economy, eliminates housing and food prices and looks at everything from haircuts to health care to hospitality. Unfortunately for monetary policymakers, it has remained stubborn at more than 4 percent.