Fed will hike interest rates higher if strong job growth, inflation continue, Fed governor says2 min read
The Federal Reserve will have to raise its key interest rate even higher than projected if a recent trend of surprisingly strong job growth, consumer spending and inflation persist, a key Fed official said Thursday.
“Recent data suggest that consumer spending isn’t slowing that much, that the labor market continues to run unsustainably hot, and that inflation is not coming dow as fast as I thought,” Fed Governor Christopher Waller said in remarks he planned to deliver at a meeting of the Mid-Size Bank Coalition of America.
“If those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released,” Waller said.
Waller, a member of the Fed’s board and its interest-rate setting committee, is considered hawkish, or more concerned about heading off inflation that spurring growth. But his recent views on inflation and rates have reflected those of his colleagues.
Last year, job growth, consumer spending and inflation all showed signs of slowing, suggesting the Fed’s aggressive rate hikes were bearing fruit.
How many interest rate hikes in 2023?
In December, Fed officials forecast that the federal funds rate would rise to a range of 5% to 5.25% and then the Fed would pause, a development that volatile stock markets and economists would welcome. That would mean two more quarter-point rate hikes since the funds rate is currently at 4.5% to 4.75%
But in January, employers added a blockbuster 517,000 jobs. Consumer spending and an underlying measure of retail sales both increased by a robust 1.8% or so; and inflation picked up more than anticipated.
What is the inflation rate?
The annual gain in the consumer price index slowed for the seventh straight month, to 6.4% from 6.5%. But the index rose 0.5% on a monthly basis after posting just a 0.1% gain in December.
Fed officials worry a robust labor market continues to bolster wages and spending, in turn pushing up yearly consumer price increases that hit a 40-year high of 9.1% last June.
Markets now predict the Fed funds rate will climb to a range of 5.25% to 5.5%, a half-point higher than estimated just a few weeks ago. Waller suggested that forecast could be on the mark if the economy continues to motor along.
More from Fed Governor Waller’s speech
At the same time, Waller acknowledged that the strong January reports could have been a byproduct of unusually mild weather that boosted consumer spending and economic activity.
“If job creation drops back down to a level consistent with the downward trajectory seen late last year, and CPI inflation pulls back significantly from the January numbers and resumes its downward path, than I would endorse raising (the funds rate) a couple more times,” in line with the Fed’s December forecast.
Other reports on February job growth and inflation over the next two weeks could be key in determining the Fed’s course in coming months.