U.S. central bankers indicated on Monday they expect interest rates to remain high and, if anything, rise given persistent inflation, contrary to market perception that the Federal Reserve would cut interest rates. Will do of 2023.
Now that the central bank has raised its benchmark overnight interest rate to a range between 5% and 5.25%, Atlanta Fed President Rafael Biostic told CNBC that “the right policy is really to wait and see what happens with the monetary measures.” How slow does the economy go.” have taken.”
According to Biostik, inflation has eased somewhat and should continue to cool, but the process will not be rapid enough to justify a rate cut any time soon. In fact, he said, “If there’s going to be an action bias, for me the bias would be to go up a bit rather than cut.”
Neil Kashkari, head of the Minneapolis Fed, said perhaps “there is more work to do on our side to try to get inflation back down.”
Inflation, which according to the consumer price index slowed to an annual rate of 5% in March from 4.9% in April, remains “very high”, he said, and the labor market, with unemployment at 3.4%, still warm. .
“We shouldn’t be fooled by a few months of positive data,” Kashkari said at the Minnesota Transportation Conference & Expo. “We are still above our 2% inflation target, and we have work to finish.”
Chicago Fed President Auston Golsby said voting for the central bank’s latest rate hike in May was a “very difficult decision” for him because of concerns about tightening credit conditions after recent bank failures.
Furthermore, he believes that the full impact of the increase in the cost of credit is yet to be felt. “We want to make sure that, as much as possible, we get inflation back on track without starting a recession,” he told CNBC.
But he also issued a warning, noting that the Silicon Valley bank had stopped hedging against a rate hike “because it believed what the market was saying” about an upcoming change in Fed policy. Failure to manage interest rate risk was a key factor in the March bankruptcy of the Santa Clara, California-based entity.
Financial markets, for their part, see only a slim chance of further rate hikes at the Fed’s policy meeting on June 13-14, and rate futures contracts see the policy rate expiring between 4.25% and 4.50%.
Part of this valuation may reflect hedging against a deeper downturn than expected. Bostic announced Monday that the recession probably won’t be long or deep.
Financial markets can also expect inflation to slow down relatively quickly.
“The market’s assessment of expectations for a lower (federal) funds rate over time is too aggressive … to continue expanding even as the economy declines,” said Goldman Sachs chief economist Jan Hatzius in a note from the Atlanta Fed.