St. Louis Fed President Alberto Musalem says the central bank will need to raise interest rates further to bring inflation back to its 2% target, though he won't say what policymakers should do at the October 27-28 meeting. Traders still expect the Fed to hold its policy rate this month and deliver its next hike in December.
Musalem presses the case for more tightening
Musalem said on Thursday the Fed will need to hike interest rates again to bring inflation back to its 2% target, speaking at a Bloomberg event in New York. He added that if a timely manner means something like 18 months, rates ought to keep rising over the next six to nine months.
He is not a voting member of the Fed's rate-setting committee this year, and he declined to say whether the Fed should raise rates at the October meeting. He said: "more monetary policy firming will be required", while adding that he hasn't prejudged the meeting's outcome.
Traders see a December move, not October
Traders broadly expect the Fed to hold its policy rate in the 3.75%-4.00% range at the October meeting. The Fed hiked rates at its September 15-16 meeting to push high inflation back toward target, and policymakers penciled in another increase by the end of the year.
Odds on an October move had been strong until New York Fed President John Williams said last week there is no urgency to act while the Fed weighs incoming data. Fed Vice Chair Philip Jefferson followed with a similar message, saying he saw no imminent need to raise rates. The Fed is now expected to deliver its next hike in December.
Musalem flags fiscal risk behind rising yields
Musalem said inflation remains the economy's primary problem even as growth stays strong and the job market holds stable, and that the Fed can likely bring inflation down without hurting hiring. He also said that despite a notable rise in bond yields, financial conditions remain accommodative and supportive of economic growth.
He said the rise in yields does not signal that investors are losing confidence in the Fed. Instead, yields are climbing on expectations that real rates will rise in a strong economy with heavy competition for capital, with strong tech-sector investment and large government borrowing needs helping keep yields elevated. He said the federal government has been on an unsustainable fiscal path for close to two decades, adding that the risk remains that heavy government borrowing could create problems for the economy.
Source: Investing.com
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