Fed officials warn they may need to take rates to higher levels

(Bloomberg) — Two Federal Reserve policymakers warned that recent stronger-than-expected data on the U.S. economy could prompt them to raise interest rates by more than previously expected.

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In remarks Thursday, Gov. Christopher Waller said that if wage and inflation data cools after hot prints in January, “I would agree to raising the target range for the federal funds rate a few more times, to an expected final interest rate of between 5.1% and 5.4. %.”

“On the other hand, if those data reports continue to come in too hot, the policy target range will need to be increased even more this year to ensure we don’t lose the momentum that was there before the January data was released. ,” Waller said in remarks prepared for delivery at an event hosted by the Mid-Size Bank Coalition of America.

His virtual event, including the Q&A session following the release of his prepared remarks, was canceled after a participant displayed pornographic content visible to viewers. The organizers said they had been victims of “teleconferencing or Zoom hijacking”.

Waller’s speech followed remarks from Atlanta Fed president Raphael Bostic, who told reporters he was still in favor of raising rates by 25 basis points in March but was open to higher borrowing costs than he expected if the economy would remain so robust.

“I want to be completely clear: There has to be an argument that we need to go higher,” Bostic said. “The jobs have come in stronger than we expected. Inflation remains stubborn at elevated levels. Consumer spending is strong. Labor markets remain quite tight.”

Market reaction to Bostic was mixed. US stocks rose on Thursday, with investors focused on the comment that the central bank could be able to pause rate hikes sometime this summer. Still, yields in the Treasury market closed higher after rising earlier in the day on another set of strong labor market data. The focus now shifts to a report on the US services sector due Friday.

US central bankers quickly raised interest rates from near zero a year ago to a target range of 4.5% to 4.75%, including a series of four massive 0.75 percentage point increases. In February, they stepped back to a 25 basis point gain after a half-point move in December.

Officials will then meet on March 21 and 22, and by then they will have seen new reports on employment and inflation. Recent incoming data is surprisingly strong: Employers added 517,000 new workers in January, while inflation remains well above the central bank’s 2% target.

Waller said the salary report, along with a drop in the unemployment rate in January to 3.4%, showed “that the job market was tightening rather than loosening.”

Fed officials discuss their changing outlook, which may include keeping policy rates high for longer than they anticipated when they released their latest forecast in December.

That outlook showed a full percentage point of spending cuts by the end of 2024, according to the median projection. Officials will update their quarterly forecasts later this month.

Fed Chairman Jerome Powell will have a chance to update lawmakers on the outlook when he heads to Capitol Hill next week to give his semiannual testimony to Congress. He will appear before the Senate Banking Committee on Tuesday and before the House Financial Services Committee on Wednesday.

(Treasury markets updates in seventh paragraph.)

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