On Thursday, the Governor of the Federal Reserve, Michelle Bowman, said that they needed to be even more aggressive in terms of hiking interest rates. She said that her fellow central bankers should agree to hike interest rates that are more than the near-term expectations of inflation.
More Hikes in the Upcoming Meetings
Attending the conference for Massachusetts Bankers Association, Bowman said that in light of the current readings of inflation, they should announce an interest rate hike of 75 basis points in the next meeting of the US central bank. But, she also added that there should be at least a 50 basis points hike in other subsequent meetings of the Fed, as long as there is data to support them.
She said that they may have to up the target range of the federal funds rate, depending on the condition of the economy. The hawkish remarks of the Federal Reserve’s Governor came, as Jerome Powell, the Chair of the Fed, appeared in front of the Senate to answer questions about inflation and recession. The chairman said that the central bank was fully committed to easing off-price pressures.
It was just a week ago that the Fed had raised interest rates by three-quarters of a percentage point, taking it between the range of 1.50% and 1.75%. Forecasts indicate that the rate is expected to increase to 3.4% by the year-end.
Inflation is A Threat
Bowman said that inflation would not allow long-term growth in jobs and that they wanted to ensure that the real interest rate was in positive territory once more. Therefore, she said that it was not logical for the rate to be below the near-term expectations of inflation.
However, she did not specify the benchmark rate in terms of inflation in the near term. A recent survey from the University of Michigan showed that the inflation reading for one year ahead climbed in June to 5.4%. As for consumer expectations, a survey was conducted by the New York Fed, which showed that inflation expectations for the year had gone up to 6.6% in the previous month.
The current inflation in the country is already three times more than the 2% target that the US Federal Reserve has set.
Forecasts of the Fed
Last week, the forecasts of the Federal Reserve were published, which showed that a 4.5% interest rate was expected by the most hawkish policymakers of the Fed at the end of 2023. They expect the rate to come down in 2024. However, the stance of individual policymakers was not specified.
The sharp increase in interest rates has fueled worries of a recession. Business confidence has also gone down and there is a slowdown in economic activity, which could eventually lead to recession. A rate hike of 75 basis points is expected by traders and rates are expected to be between the 3.25% and 3.5% range by the end of the year. Bowman noted in her remarks that while there are risks associated with hiking rates, reducing inflation is their priority.