Two Federal Reserve officials, Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly, have stated that more rate hikes are necessary to control inflation, which has proven to be more persistent than previously thought. Mester believes that rates need to move up “somewhat further” and be held at that level. She has not yet made a decision about whether rates should be raised at the next meeting, but hinted that the Fed’s next move could be to raise rates and then hold them at that level to gather more data. Mester stated that a slightly higher policy rate would balance the probabilities of the next policy move being a tightening or loosening move. The central bank decided to hold off on raising rates at its last policy meeting in June, but signaled that rates could still rise to as high as 5.6%, indicating that two additional rate hikes are likely this year. Some Fed officials wanted to raise rates by 0.25% last month, but agreed to the pause to assess the impact of previous rate hikes. Daly also called for higher rates, stating that two more hikes are needed this year to bring down inflation. Both officials expressed concerns about potential credit tightening from bank failures earlier this year, although there is not much evidence of banks becoming stricter about lending outside of the Fed’s rate hikes. They emphasized the need to monitor the situation closely.
How does the Federal Reserve plan to strike a balance between tightening monetary policy and ensuring the stability of the financial system
Federal Reserve Officials Call for More Rate Hikes to Tackle Persistent Inflation
In a recent statement, two Federal Reserve officials, Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly, have voiced their belief that additional rate hikes are necessary to control inflation, which has proven to be more persistent than previously anticipated.
Mester, in particular, advocates for rates to increase “somewhat further” and be maintained at that level. While she has not made a final decision on whether to raise rates at the next meeting, she hinted that the Fed’s next move could be an increase followed by a period of stability to gather more data. Mester explained that a slightly higher policy rate would strike a balance between the possibilities of tightening or loosening monetary policy.
During the last policy meeting in June, the central bank decided to hold off on rate hikes but indicated that rates could potentially rise as high as 5.6%. This suggests that two additional rate hikes may be on the horizon for the remainder of the year. While some Fed officials initially proposed a 0.25% rate hike last month, they agreed to a pause in order to evaluate the impact of previous rate increases.
Daly, echoing Mester’s sentiment, also called for higher rates and emphasized the need for two more hikes this year to combat inflation. Both officials expressed concerns about the potential credit tightening that could arise from earlier bank failures. However, there is limited evidence of banks becoming stricter in their lending practices outside of the Fed’s rate hikes. As a result, close monitoring of the situation is deemed essential by both officials.
The Federal Reserve continues to grapple with persistent inflation and remains dedicated to taking the necessary steps to keep it in check. With the probability of additional rate hikes in the near future, the central bank aims to strike a delicate balance between tightening monetary policy and ensuring the stability of the financial system.
