Interest Rates May Rise Again, Fed Warns

The Federal Reserve may need to raise interest rates further to cool down the US economy and bring inflation under control, according to a senior Fed official.

Eric Rosengren, the president of the Boston Fed, said in an interview with Financial Advisor IQ that the US economy was still too hot to achieve the Fed’s 2% inflation target, despite the recent slowdown in growth and consumer spending.

“We may have more to do,” Rosengren said. “I think it’s quite likely that the economy will prove resilient enough that we do have to tighten more than is currently priced into the market.”

Rosengren’s comments came ahead of a closely watched speech by Fed chair Jerome Powell at the annual Jackson Hole symposium on Friday, where he is expected to address the outlook for monetary policy and the challenges posed by the coronavirus pandemic and its variants.

The Fed has raised interest rates 11 times since December 2021, from near zero to a range of 2.5% to 2.75%, in an effort to prevent the economy from overheating and inflation from spiraling out of control. The Fed has also begun to taper its monthly bond purchases, which have supported the financial markets and the economic recovery since the onset of the pandemic.

The Fed’s actions have helped to bring down inflation from a 40-year high of 9% in June 2022 to 3% in July 2023, according to the latest data from the Bureau of Labor Statistics. However, inflation remains above the Fed’s target and some analysts fear that it could prove more persistent than expected, especially as supply chain disruptions, labor shortages and rising commodity prices continue to put upward pressure on costs.

Rosengren said he was concerned that inflation expectations, which measure how consumers and businesses anticipate future price changes, could become unanchored if inflation remained elevated for too long. He said he preferred to see inflation expectations closer to 2% than to 3%, which is where some surveys have shown them recently.

He also said he was worried that the housing market, which has been booming amid low interest rates and high demand, could pose a risk to financial stability if prices became unsustainable and borrowers took on too much debt.

Rosengren’s views contrast with those of some other Fed officials, who have argued that the current bout of inflation is largely transitory and that the Fed should be patient and cautious in tightening monetary policy. They have pointed to signs of slowing growth and consumer spending in the third quarter, as well as the uncertainty caused by the Delta variant of Covid-19, which has led to a surge in infections and hospitalizations across the country.

Powell, who is widely seen as a moderate on the Fed’s policy-setting committee, has tried to strike a balance between acknowledging the progress made by the economy and signaling that the Fed is ready to act if needed. He has also stressed that any future rate hikes will depend on incoming data and not on forecasts or pre-set plans.

The market expects the Fed to raise interest rates once more this year, most likely in December, and three times next year, according to futures contracts traded on the Chicago Mercantile Exchange. However, some economists think that the Fed could move faster or slower depending on how the economy evolves.

“The Fed faces a delicate balancing act,” said Mark Zandi, chief economist at Moody’s Analytics. “It needs to normalize monetary policy as the economy returns to full employment and inflation stabilizes around its target, but it also needs to avoid triggering a recession or a financial crisis.”