Several Fed officials have made hawkish comments in recent days, reinforcing expectations that the Fed will raise interest rates by 50 basis points next month in an effort to curb the worst inflation in 40 years, the Zhitong Financial APP has learned.
"I think this is a reasonable choice for us because the federal funds rate is very low," New York Fed President John Williams said in an interview with Bloomberg on Thursday. "We really need to make policy adjustments back to more neutral levels."
The comments also pushed the yield on 10-year Treasuries to 2.8 per cent at one point, up from about 2.70 per cent.
Mr Williams's comments underscored expectations that the Fed plans to raise interest rates to pre-epidemic levels or even higher. This means that in addition to the 25 basis points hike made last month, the Fed will tighten by about 200 basis points during the remaining six meetings this year, bringing interest rates to about 2.5 per cent.
Investors have also clearly received this message. The interest rate futures market is now almost fully digesting the Fed's expectation of raising interest rates by 50 basis points at its May 3-4 meeting, when Fed officials may also announce plans to start shrinking their balance sheet by nearly $9 trillion.
In addition, Williams also expressed confidence in the Fed's ability to achieve a soft landing in the economy, adding that discussions on the Fed's forward guidance around its policy plan have begun.
"in the past few months, we have seen dramatic and significant changes in bond yields and financial conditions, which has enabled the Fed to be more prepared to adjust its policy to rebalance supply and demand," he said.
Patrick Harker, president of the Philadelphia Fed, also expressed concern about inflation in a speech at Ryder University in Lawrence, New Jersey: "generous fiscal policy, supply chain disruptions and loose monetary policy have pushed inflation much higher than my FOMC colleagues and I can accept." He also said he was concerned that inflation expectations had become "out of control".
Comments such as Federal Reserve Governor Christopher Waller further support that the Fed will be able to control the impact of a 50 basis point rate hike. Waller said in an interview on Wednesday that the US economy could raise interest rates by 50 basis points in May, June and July. "I don't think there is any value in trying to hit the market; we are not in a Volcker moment. We will do everything we can to bring inflation down, but we can do so in an orderly manner without putting too much pressure on the financial markets. "
On Thursday, Cleveland Fed President Mestre Mestre also expressed confidence at an event organized by Akron University that the Fed can control inflation without damaging the economy. "our aim is to reduce easing as quickly as necessary to better balance demand with limited supply to control inflation while maintaining an expansion of economic activity and a healthy labour market," Mr Mestre said. "
Raise interest rates to above neutral level?
However, policy makers are divided over whether interest rates need to be raised above neutral levels.
Fed doves argue that they do not have to commit to more action until they see how the economy reacts to the expected tightening in financial markets, simply pushing interest rates to neutral levels.
They also point out that shrinking balance sheets is another factor that cools the economy. The minutes of the March meeting showed that officials supported a plan to cut $95 billion a month. Mr Huck also pointed out on Thursday that the balance sheet would withdraw from easing "methodically" and that the process would begin "soon".
Lael Brainard, the Fed governor, said on Tuesday that higher interest rates and shrinking balance sheets would reduce inflation to 2 per cent over time. She also pointed out that the change in market expectations shows that the Fed's forward guidance has tightened the financial environment.
Some economists are also starting to worry that the Fed may push interest rates too high, plunging the economy into recession.
Thomas Costerg, senior US economist at Pictet Wealth Management, said: "it is now clear that the Fed will raise interest rates by 50 basis points in May. The risk of policy mistakes is rising because it is not clear whether the economy can absorb several 50 basis point interest rate hikes. "
But hawks such as James Bullard, president of the St. Louis Fed, want to raise interest rates above 3 per cent this year and say it is "wishful thinking" that inflation will subside without stepping on the policy brakes.