Fed Policymakers Call For Target Interest Rate Above 5% To Beat Inflation

Federal Reserve policymakers on Wednesday reiterated their support for hiking the U.S. central bank's target interest rate above 5%, even as inflation shows signs of cooling and the Fed's own canvassing suggests economic activity is slowing in large swaths of the country.

"We're not at 5% yet, we're not above 5%, which I think is going to be needed given where my projections are for the economy," Cleveland Fed President Loretta Mester said in an interview with the Associated Press, even as she declined to say how big a rate hike will be appropriate at the Fed's policy meeting in two weeks. "I just think we need to keep going, and we'll discuss at the meeting how much to do."

The Fed's benchmark overnight lending rate currently sits in a target range of 4.25% to 4.50%.

Investors expect the Fed to lift that rate by a quarter of a percentage point at the end of its Jan. 31 -Feb. 1 meeting.

A second straight monthly decline in U.S. retail sales, a slowdown in producer price inflation to 6.2% in the 12 months ended in December, and a drop in manufacturing output - all reported earlier on Wednesday - have helped stoke expectations that the Fed will end its current round of rate hikes with the policy rate just shy of 5%.

The central bank began raising borrowing costs last March, when the policy rate was in the 0%-0.25% range and inflation was starting to make a climb that would see it rise to 40-year highs several times the Fed's 2% target.

"We're beginning to see the kind of actions that we need to see," Mester said. "Good signs that things are moving in the right direction ... That's important input into how we're thinking about where policy needs to go."

She added, however, that the Fed's policy rate will likely ultimately need to go "a bit higher" even than the 5.00%-5.25% range that most of her colleagues expect, and stay there for some time to further slow inflation.

'WHY STALL?'

St. Louis Fed President James Bullard, speaking with the Wall Street Journal earlier also said that as of December he expected the policy rate would need to rise to the 5.25%-5.50% range, and added that policymakers should get that rate to above 5% "as quickly as we can."

Several Fed officials have expressed support for slowing to quarter-percentage-point rate increases so as not to slow the labor market more than necessary. The Fed delivered a total of four 75-basis-point and two 50-basis-point hikes last year after kicking off the hiking cycle with a quarter-percentage-point increase.

Bullard expressed more impatience. Asked if he was open to another half-percentage-point increase at the Fed's upcoming meeting, he asked "why not go to where we're supposed to go? ... Why stall?"

The answer may in part be found in the latest "Beige Book" report published by the Fed on Wednesday. The compilation of survey data from the central bank's districts around the country showed that while prices continued to increase, the pace in most districts was reported to have slowed.

And while employment continued to grow at a "modest to moderate" pace in much of the country, and several Fed districts including the Western states represented by the San Francisco and Dallas Feds reported modest economic growth, the New York Fed reported a contraction in activity, four other districts reported slowdowns or slight declines, and most expected little growth ahead.

Still, Fed policymakers seem likely to push ahead with the rate hikes for now, with many noting that the mistake they don't want to make is to stop short of defeating inflation, only to have to raise rates even more to do the job later on, as happened in the 1970s and 1980s

Even Philadelphia Fed President Patrick Harker, who is generally less hawkish than Mester or Bullard and wants the Fed to switch to quarter-percentage-point hikes ahead, sees "a few more" rises in borrowing costs before a pause.

Fed Chair Jerome Powell, who tested positive for COVID-19 on Wednesday and is experiencing mild symptoms from the virus, said after last month's policy meeting that the inflation battle had not been won and that more rate hikes were coming in 2023.