WASHINGTON: Federal Reserve officials have signalled that further interest-rate increases could be necessary as inflation continues to remain above the central bank’s target, raising concerns about the persistence of price pressures across the US economy.
San Francisco Federal Reserve President Mary Daly said her current assessment favoured additional monetary tightening, particularly as services inflation excluding housing has shown signs of strengthening rather than moderating.
Speaking at a forecast event organised by the University of Nevada, Las Vegas Center for Business and Economic Research, Daly indicated that policymakers would carefully assess economic developments before making decisions at upcoming meetings.
“We’re going to need to, in all likelihood, raise rates,” Daly said, adding that she would discuss the appropriate course of action with fellow policymakers at the December meeting and in subsequent deliberations.
Her remarks reflect growing concern among some Federal Reserve officials that inflationary pressures could remain elevated despite the central bank’s previous efforts to bring price growth under control.
Recent figures show that the core Consumer Price Index (CPI), which excludes volatile food and energy costs, increased approximately 0.3 per cent month-on-month in each of the previous three months. The pace remains above the monthly growth of 0.2 per cent or less generally considered consistent with the Fed’s annual inflation objective of 2 per cent.
Daly expressed particular concern about services inflation excluding housing, describing its recent movement as unfavourable. She noted that inflation in this segment can prove difficult to contain because businesses often transfer higher operating expenses to consumers.
According to Daly, companies facing increased expenditure on information technology products, energy and other essential inputs may respond by raising the prices of their goods and services.
She also indicated that consumer spending would remain an important factor in assessing the economy before the next policy decision.
The Federal Reserve increased its benchmark interest rate by 25 basis points in September before maintaining the target range at 3.75 per cent to 4 per cent in October.
Financial markets have been anticipating additional quarter-point increases at the December 8-9 and January 26-27 policy meetings. However, Federal Reserve Governor Christopher Waller has also raised the possibility of a more substantial 50-basis-point increase in December.
Daly refrained from identifying a specific timeline for future adjustments, emphasising that monetary policy decisions would depend on incoming economic information.
Collins anticipates further monetary tightening
Boston Federal Reserve President Susan Collins has also supported additional policy tightening, warning that persistent inflation could require a more restrictive approach than she had anticipated earlier.
In an interview with Bloomberg Television, Collins said the direction of monetary policy was becoming increasingly clear and indicated that another adjustment could be appropriate in the near future.
She observed that recent inflation readings had been disappointing and suggested that price pressures were becoming more widespread across different sections of the economy.
Collins acknowledged that the appropriate policy trajectory might now involve tighter financial conditions than she had expected a few months earlier.
However, she avoided providing a specific estimate of how high interest rates might eventually rise or how quickly policymakers should act.
She described a gradual and carefully managed adjustment as the preferred approach, while acknowledging that changing economic circumstances could require a different response.
Speaking at a housing conference organised by the Boston Federal Reserve, Collins also highlighted the importance of restoring price stability to support a healthier housing market.
She recognised that higher borrowing costs could create short-term difficulties for households and businesses but maintained that controlling inflation remained essential for long-term economic stability.
Collins further noted that financial markets were operating effectively despite uncertainty surrounding the future direction of monetary policy.
Logan calls for stronger financial stability measures
Dallas Federal Reserve President Lorie Logan has also argued that inflation remains excessively high and that monetary policy should become more restrictive.
Earlier in the week, Logan advocated at least two additional interest-rate increases of 25 basis points each, potentially implemented within a relatively short period.
Alongside her concerns about inflation, Logan highlighted the importance of strengthening the Federal Reserve’s financial stability mechanisms to ensure that banks and financial markets can access liquidity during periods of stress.
Addressing a Dallas Fed conference on bank funding, she said the US Treasury market was functioning effectively despite occasional volatility in interest rates.
She also observed that banks had made progress in improving access to emergency financing facilities over the past three years.
Nevertheless, Logan called for improvements to the central bank’s mechanisms for supporting Treasury-market operations and providing liquidity to financial institutions without undermining efforts to control inflation.
She argued that the Federal Open Market Committee (FOMC) should develop more effective instruments to address disruptions in financial markets while maintaining a restrictive monetary stance.
Logan explained that previous Federal Reserve interventions to stabilise markets had frequently coincided with periods when policymakers were also seeking to stimulate economic activity.
In such circumstances, asset purchases could simultaneously improve market liquidity and provide monetary support.
However, she cautioned that the situation would be different if financial-market disruptions emerged while the central bank was attempting to tighten monetary policy.
According to Logan, using the same instruments to support market functioning during an inflation-control campaign could complicate policy communication and create confusion about the Fed’s objectives.
She stressed that the central bank should therefore strengthen its ability to address market disruptions without introducing unnecessary economic stimulus.
Logan also encouraged banks to continue improving their contingency funding arrangements, particularly by preparing to use the Federal Reserve’s discount window when required.
She pointed out that the expansion of instant payment services, including FedNow, alongside private-sector payment networks, could increase liquidity requirements during weekends and public holidays.
With the Federal Reserve considering an expansion of its Fedwire Funds Service to include Sundays and weekday holidays, Logan suggested that discount-window operations should also become available over longer periods.
She acknowledged that such a change would require broader discussions and agreement among Federal Reserve officials rather than an individual decision by a regional bank.
Additionally, Logan called for the development of central clearing arrangements for the Fed’s repurchase agreement, or repo, operations.
She said such a mechanism could reduce the balance-sheet costs associated with financial intermediation and allow liquidity provided by the central bank to reach a wider section of the financial market more efficiently.
The comments from Daly, Collins and Logan highlight divisions in the economic outlook but point towards growing support among several policymakers for maintaining a restrictive monetary approach.
With inflation continuing to exceed the Federal Reserve’s 2 per cent objective, upcoming economic indicators and consumer spending trends are expected to play an important role in determining the timing and scale of future interest-rate decisions.