Federal Reserve officials warn of higher interest rates

A string of strong economic data and signs that inflation is stubbornly high could prompt the Federal Reserve to raise interest rates higher than previously forecast in the coming months, several Fed officials say.

Christopher Waller, a member of the Fed’s influential board, said Thursday that if the economy remains strong and inflation remains high, the central bank should raise rates above 5.4%. That would be higher than Fed officials indicated in December, when they predicted it would peak at around 5.1% this year.

“Recent data suggests that consumer spending is not slowing down that much, the job market is still unsustainably warm, and inflation is not falling as fast as I thought,” Waller said in prepared remarks to a business conference in Los Angeles.

His proposal contrasted with a speech he gave in January titled “A Plea for Cautious Optimism,” which reflected the prevailing mood as inflation peaked and continued to fall.

Even if data to be released later this month shows hiring returns and inflation cooling, Waller said he would still favor a fall in the Fed’s interest rate from its current level of around 4.6. % between 5% and 5.5%. And if economic data “continues to get too hot,” he said, the Fed should “raise rates even more this year to make sure we don’t lose the momentum that was there.” robust economic reports for January.

Last year, the Fed raised short-term interest rates at the fastest pace in four decades to combat the worst inflation since the early 1980s. These increases drove interest rates across the economy: mortgage rates almost doubled to 6.7%, and car loans, credit card loans and business loans rose in price.

The Fed’s goal is to cool the economy by raising the cost of borrowing and slowing corporate and consumer spending. More moderate growth should help bring inflation back to the Fed’s target of 2%. Fed officials will then meet on March 21-22, when they are expected to raise interest rates by a quarter point to about 4.9%.

In recent weeks, several reports suggested that the economy was stronger and inflation more stubborn than previous data had shown. Overall, more than half a million jobs were added to the economy in January and the unemployment rate hit a 53-year low of 3.4%.

Inflation figures were also revised upwards and came out warmer than expected in January. Waller noted that for the last three months of last year, core inflation – which excludes volatile food and energy categories – was revised from 3.1% to an annualized rate of 4.3%. It then rose to 4.6% in January.

“While inflation has been falling since the middle of last year,” Waller said, “recent data suggests we haven’t made as much progress as we thought.”

Other Fed officials also expressed dismay at reports showing higher inflation and warmer growth. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said Wednesday, “I’m inclined to keep raising.”

“It’s about data points that suggest we’re not moving forward as fast as we’d like,” Kashkari said.

And on Thursday, Raphael Bostic, president of the Atlanta Fed, said he favors raising rates to about 5.1% in the coming months, just as predicted in December. He added that the Fed’s rate hikes may not start until this summer, so the Fed should be careful not to restrict lending too much and trigger a recession.

Still, Bostic added, “There are arguments that we should go higher.”

“Jobs have come in stronger than expected,” Bostic said. “Inflation is stubbornly stuck at high levels. Consumer spending is strong. Labor markets remain quite tight.”

And on Friday, Cleveland Fed President Loretta Mester told Bloomberg News that the Fed “needs to do a little bit more” to raise rates and keep them there for a longer period of time.