Fed Officials Mull Whether Rates High Enough as Inflation Expectations Jump

  • Debate among Federal Reserve officials deepened this week over whether U.S. interest rates are high enough, and may be stoked further after a key survey showed a jump in consumers' inflation expectations. "There are ... important upside risks to inflation that are on my mind, and I think there are also uncertainties about how restrictive policy is and whether it's sufficiently restrictive" to return inflation to the U.S. central bank's 2% target, Dallas Fed President Lorie Logan said at a Louisiana Bankers Association conference in New Orleans.
  • "I think it's just too early to think about cutting rates. I think I need to see some of these uncertainties resolved … and we need to remain very flexible," Logan said, though she did not directly address whether she feels the Fed may need to again raise its benchmark policy rate from the 5.25%-5.50% range that has been maintained since July.
  • In an appearance on CNBC, Minneapolis Fed President Neel Kashkari said he's in a "wait-and-see mode" in regards to what's next for central bank policy and the Fed can stay at current rates "as long as needed" to bring inflation down. However, he added there is a "high" bar to concluding that higher rates are needed to cool inflation. Many U.S. central bank officials, including Fed Chair Jerome Powell, have said they still think further rate hikes will prove unnecessary.
  • Data on Friday provided a further jolt in the wrong direction. Year-ahead inflation expectations in the University of Michigan's survey of consumer sentiment rose from 3.2% to 3.5% in May, the highest level since November, and longer-term expectations ticked higher as well.
  • While a month's reversal may not be significant, if it continues it would challenge the Fed's current assessment that expectations are "anchored"[1] - and add to arguments made by Logan and some others that rates may not be high enough to finish the inflation fight.

(Source: Reuters)

 

[1] Anchored expectations are considered by Fed officials as an important sign of the central bank's credibility and an aid in bringing inflation back to 2%.