Fed officials expect debate over peak rates and when to slow hikes

(Bloomberg) – U.S. central bankers have said the next phase of their inflation-fighting campaign will be to debate how high to raise interest rates and when to slow the pace of increases.

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St. Louis Fed President James Bullard and San Francisco Fed Chief Mary Daly both stressed the need to continue to tighten policy with inflation at its highest level in 40 years, while suggesting more caution next year.

Their comments at separate events on Friday come as officials are set to enter their blackout period ahead of their Nov. 1-2 policy meeting. Both have made it clear that they expect the discussion to be on the table at this gathering.

“You came from scratch. You went to this much higher level of the policy rate. But once you’re at the right level, you can just make minor adjustments at that point — maybe to stay where you are, maybe to go a little higher, depending on the incoming data,” Bullard said. in an interview with Wharton. Business Radio on SiriusXM.

“This judgment on where you need to be to put significant downward pressure on inflation, I think is a key part of the policy debate in the next couple of meetings,” he said, citing models indicating rates of 4.5% to 4.75% and market bets at a peak of 5%.

Bullard votes on monetary policy this year.

Fed officials are expected to raise rates by 75 basis points next month for the fourth straight meeting, with investors betting on either the same or a 50 basis point move in December.

Daly said policymakers should start planning for a reduction in the magnitude of rate hikes, although it’s not yet time to “pull back” from big hikes.

“That should at least be something we’re considering at this point, but the data hasn’t cooperated,” Daly said in a discussion moderated by the University of California, Berkeley. At the November meeting, “we could find ourselves, and the markets have certainly priced that in, with another 75 basis point increase, but I would really recommend people not to take that away because it’s 75 forever. “

A slowdown to more gradual increases of 50 or 25 basis points will be appropriate as the Fed’s benchmark rate nears its terminal level for this hike cycle, Daly said.

Fed forecasts released last month showed officials expecting rates to rise to 4.4% this year and 4.6% in 2023, suggesting the pace of hikes will slow to 50 basis points in December and then drop back to 25 basis points early next year.

Since then, disappointing inflation news showing core consumer prices hit a 40-year high of 6.6% in September has led some officials to suggest a higher spike may be needed to cool demand and reduce price pressures.

“We have to think about how restrictive we have to be and that means we have to be data dependent,” said Daly, who is not voting on the policy this year.

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Carol N. Valencia