A top official at the Federal Reserve has left the door open for the US central bank to raise interest rates by a full percentage point at the end of this month if warranted by incoming data.
Fed governor Christopher Waller on Thursday reiterated his support for a three-quarter percentage point increase at the July gathering of the Federal Open Market Committee, but indicated that he was open to a larger move.
“My base case for July depends on incoming data. We have important data releases on retail sales and housing coming in before the July meeting,” he said at an event hosted by the Global Interdependence Center.
“If that data comes in materially stronger than expected it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down,” he added.
Waller’s comments come just one day after an alarming US inflation report, which showed consumer price growth had accelerated to a new 40-year high of 9.1 per cent in June.
The data, which Waller said was a “major league disappointment”, also showed a worrying uptick in “core” inflation, which strips out volatile items such as energy and food. The increase was led by rising rents and other shelter-related costs as well as services inflation.
Further evidence that inflation is at greater risk of becoming entrenched raised market expectations of a 1 percentage point interest rate increase at this month’s meeting. Prior to Waller’s comments on Thursday morning, investors in the futures market were pricing in over an 80 per cent chance that the Fed would increase interest rates by a full point, up from a roughly 0 per cent chance last week.
The expectations receded following his remarks, with Waller noting that market participants had been “getting ahead of themselves”. The futures market is now pricing in a 40 per cent chance that the Fed will deliver its first 1 percentage point interest rate increase since the central bank consistently began using the federal funds rate as its primary policy tool in the early 1990s.
In a discussion that followed his speech, Waller indicated that a 0.75 percentage point rate rise was the bare minimum the Fed should do, acknowledging that such an adjustment was “huge”.
“Don’t think that if you’re not going 100, you’re not doing your job,” he added.
Not a single Fed official has formally endorsed a full percentage point rate rise yet, but importantly none have ruled out such a possibility.
Loretta Mester, president of the Cleveland Fed and a voting member on the FOMC, said on Wednesday that she was watching incoming data before drawing conclusions.
“We don’t have to make that decision today,” she said when asked in an interview with Bloomberg.
Raphael Bostic, president of the Atlanta Fed, meanwhile said “everything is in play” following the “concerning” inflation report.
However, James Bullard, the hawkish president from St Louis, said that a 0.75 percentage point move “has a lot of virtue to it”, noting that an increase of such a size would bring the federal funds rate to a level in line with long-term estimates of neutral — a threshold that neither stimulates or restricts economic activity when inflation is running at 2 per cent.
The Fed is chiefly concerned that elevated inflation will feed through to a dangerous cycle in which expectations of future price increases get out of control — a risk Waller spoke to directly on Thursday.
“We want to reduce excessive inflation, whatever the source, in part because whether it comes from supply or demand high inflation can push up longer-run inflation expectations and thus affect spending and pricing decisions in the near term,” he said. “These decisions can then push up prices even more and make inflation harder to get under control.”
Waller said he therefore endorsed further rate rises until a “significant moderation” in core inflation occurred.
Additional reporting by Adam Samson in London
