Fed Officials Warn They May Need to Lift Rates to a Higher Peak

(Bloomberg) — Two Federal Reserve policymakers cautioned that recent stronger-than-expected readings on the US economy could push them to raise interest rates by more than previously expected.

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In remarks Thursday, Governor Christopher Waller said that if payroll and inflation data cool after hot prints in January, “then I would endorse raising the target range for the federal funds rate a couple more times, to a projected terminal rate 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 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 in remarks prepared for delivery at an event hosted by the Mid-Size Bank Coalition of America.

His virtual event, including the question and answer session following delivery of his prepared remarks, was canceled after a participant displayed pornographic content that was visible to viewers. The organizers said they had been the victim of “teleconferencing or Zoom hijacking.”

Waller’s speech followed comments by Atlanta Fed President Raphael Bostic, who told reporters that he still favored raising rates by 25 basis points in March but was open to lifting borrowing costs higher than he had envisioned if the economy remained so robust.

“I want to be completely clear: There is a case to be made that we need to go higher,” Bostic said. “Jobs have come in stronger than we expected. Inflation is remaining stubborn at elevated levels. Consumer spending is strong. Labor markets remain quite tight.”

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

US central bankers have raised rates rapidly from near zero a year ago to a target range of 4.5% to 4.75%, including a series of four jumbo 0.75 percentage-point increases. In February, they stepped down to a 25 basis-point increase after a half-point move in December.

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

Waller said the payroll report, together with a decline in the unemployment rate in January to 3.4%, showed “that, instead of loosening, the labor market was tightening.”

Fed officials are discussing their evolving outlook, which may include holding the policy rate higher for longer than they expected when they published their last forecast in December.

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

Fed Chair Jerome Powell will have a chance to update lawmakers on the outlook when he heads to Capitol Hill next week to deliver his semi-annual testimony to Congress. He appears before the Senate Banking Committee on Tuesday and the House Financial Services Committee Wednesday.

(Updates with Treasury markets in seventh paragraph.)

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