US central bankers expect interest rates to stay high and, if anything, rise given persistent inflation, in stark contrast to market sentiment that the Federal Reserve (Fed) will cut the cost of credit long before the end of 2023.
Now that the US central bank has raised its benchmark overnight interest rate to a range between 5 and 5.25%, Atlanta Fed President Raphael Bostic told CNBC that “the proper policy is to wait and see how much is slows down the economy from the monetary measures we have taken.”
According to Bostic, inflation has eased somewhat and will continue to cool, but the process will not be fast enough to justify a rate cut any time soon. In fact, he added that if there was a bias to action, it would be one to go a little higher, rather than cut.
Neel Kashkari, head of the Minneapolis Fed, said there is probably “more work to do on our part to try to bring inflation back down.”
Inflation, which slowed in April to an annual rate of 4.9% from 5% in March, according to the Consumer Price Index, continues “too high,” he said, and the labor market, with unemployment at 3.4%, continues hot.
We must not be fooled by a few months of positive data (…) We are still well above our 2% inflation target and we have to finish the job,” Kashkari warned at the Minnesota Transportation Conference & EXPO.
For his part, Austan Goolsbee, president of the Chicago Fed, mentioned that voting in favor of the last rate hike in May was a “very difficult” decision due to his concern about the tightening of credit conditions after the recent bankruptcies. banking.
In addition, he considers that the full impact of the increase in the cost of credit has not yet been felt. “We want to make sure, as far as possible, that inflation gets back on the right path, the target path, without starting a recession,” he told CNBC.
He issued a caveat, however, noting that Silicon Valley Bank stopped hedging against rate hikes “because it believed what the market said” about an upcoming change in Fed policy. interest was a key factor in the March bankruptcy of the Santa Clara, California-based entity.
Financial markets, for their part, only contemplate a small possibility of a new rate hike at the monetary policy meeting on June 13 and 14, and rate futures contracts anticipate that the official rate will end the year between 4.25 and 4.50 percent.
Part of this valuation may reflect hedges against a deeper than expected recession. Bostic declared that the recession would be neither long nor deep.
Financial markets also expect inflation to slow down fairly quickly.
“Market valuations are too aggressive in expecting a lower rate over time. The economy continues to expand even with falling inflation,” Jan Hatzius, chief economist at Goldman Sachs, said at an Atlanta Fed event.
