The case for a half-point interest rate hike at the Federal Reserve’s next policy meeting in May has grown, according to Mary Daly, president of the US central bank’s San Francisco branch, in the latest sign that it is preparing aggressive measures to eradicate high inflation.
Daly joins a growing group of Fed officials who have ruled out a gradual approach to reducing support for the economy after the pandemic-induced recession. They have adopted a faster retreat as the labor market has recovered and price pressures have become far-reaching.
The support has merged in recent weeks for interest rates to rise to a “neutral” level that neither helps nor restrains growth, and to get there faster than initially expected by moving in increments larger than the quarter rate hike knitted delivered in March. That means resurrecting a tool last used more than two decades ago and raising rates by half a percentage point at one or more meetings this year.
“The 50 case, barring any negative surprises between now and the next meeting, has grown,” Daly said in an interview with the Financial Times on Friday. “I’m more confident that taking these early adjustments would be appropriate.”
Estimating the neutral policy rate between 2.3% and 2.5%, and advocating reaching that level “efficiently” this year, Daly acknowledged that translates into “multiple” adjustments of half a point given the target range of between 0.25% percent and 0.50 percent.
Taking cues from some of the top lawmakers on the Federal Open Market Committee in recent weeks, including Jay Powell, the chairman, Wall Street economists have raised their forecasts for interest rates. They now expect the central bank to go ahead with half-point moves in May and June before dropping to a quarter-point for the remaining four meetings after that.
Citigroup believes the Fed could even go so far as to offer half-point hikes at its next four meetings, following the lead of several officials who have backed up moving rates above neutral this year. Most economists expect the Fed to start cutting its $9 trillion balance sheet next month.
Daly’s comments follow the release of another strong job report that showed 431,000 jobs added in March and the unemployment rate falling to the lowest level since before the pandemic, at 3.6 percent.
Daly said the latest data strengthens the view that the labor market is “very strong” and “adjusted to an unsustainable level.”
“If you want a job in the United States, you can get one and you can probably get multiple jobs right now,” he said. “If you’re an employer looking for workers, it’s hard to hire and retain them.”
While the combination of a “slack” labor market and inflation running at the fastest pace in 40 years justifies a move toward neutrality, Daly said the Fed would proceed carefully enough to avoid an “unforced error.” that destabilizes financial markets or the broader economy.
So far, Fed officials appear confident in their ability to rein in demand and rein in inflation without causing widespread job losses or a recession. Powell spoke optimistically about achieving this Soft landing in his most recent public appearance last month.
Daly acknowledged that the economy may need to slow considerably to bring inflation back in line with the central bank’s 2 percent target. But he drew a distinction from the 1970s, when then-President Paul Volcker’s efforts to control rising prices and tie down inflation expectations caused a sharp economic contraction.
“Our job really is just to balance supply and demand, and that’s an easier job than trying to reset the inflation anchor to something more consistent with price stability,” he said.
“I am very optimistic that we can avoid a hard landing.”