The U.S. Federal Reserve should raise interest rates by a half percentage point each time at more than its next two meetings, Fed Governor Christopher Waller said on Monday, underscoring tensions at the central bank about how aggressively to tighten policy as it battles to bring down high inflation.
“I support tightening policy by another 50 basis points for several meetings,” Waller said in prepared remarks to the Institute for Monetary and Financial Stability in Frankfurt, Germany. “In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2 percent target.”
The Fed raised its benchmark policy rate by half a percentage point earlier this month, to a target range of between 0.75 percent and 1 percent, and plans further increases of the same size at its next two meetings in June and July.
Debate at the Fed has shifted to the interest rate hikes required for the remainder of the year. Most policymakers have said they want to wait and see how much inflation comes down over the summer before deciding whether they need to increase of reduce the size of an interest rate hike in September.
One policymaker though, Atlanta Fed President Raphael Bostic, said last week that he was in favor of a “pause” at the September meeting to allow time to assess the impact of the Fed’s moves on the economy and inflation.
By contrast, St. Louis Fed President James Bullard has said he wants the Fed to hike rates to 3.5 percent by year’s end, which would involve half percentage-point increases at all the Fed’s remaining meetings.
Waller said he wants to see the central bank raising its policy rate above neutral—the level that neither stimulates nor constrains economic growth—by the end of this year but appeared less aggressive than Bullard. Investors currently see the federal funds rate in a range between 2.50 percent and 2.75 percent by year’s end, Waller said, noting his plan for rate hikes was not radically different.
The Fed’s moves so far have been met with an equities sell-off and surge in U.S. Treasury yields and the dollar amid fears its more aggressive stance could cause a recession.
Fears of an economic downturn have also been exacerbated by Russia’s war in Ukraine as well as China’s zero COVID-19 policy, which have further entangled supply chains.
Waller said he is optimistic the strong labor market can handle higher rates without a significant increase in unemployment and added that should inflation remain stubbornly high he is prepared to act more aggressively on rates.
There are already signs inflation has peaked. In the 12 months through April, the personal consumption expenditures (PCE) price index, the Fed’s preferred gauge of inflation, advanced 6.3 percent after jumping 6.6 percent in March, the Commerce Department reported on Friday.
So-called core PCE prices increased 4.9 percent year-on-year in April after rising 5.2 percent in March. It was the second straight month that the rate of increase reflected in the annual core PCE price index decelerated.
But Waller remained unmoved by those readings. “No matter which measure is considered ... headline inflation has come in above 4 percent for about a year and core inflation is not coming down enough to meet the Fed’s target anytime soon.”
