According to San Francisco Federal Reserve Bank President Mary Daly, two additional interest rate increases in the United States this year are a “very reasonable” estimate.
“I want to make sure that we balance those risks on both sides, of under or over-tightening. Adding another six weeks to our decision space, to me seems optimal and prudent.”
According to a press release, the risks of raising rates too much against too little are now “about balanced,” Daly said, in contrast to last year when the worry that inflation may spiral out of control outweighed the risk of slowing the economy more than was necessary.
After 10 straight rises to the policy rate with the goal of stifling inflation, the Fed’s policymakers this week agreed to maintain it at the current range of 5% to 5.25%.
However, a majority of Fed policymakers also think that the rate will need to reach 5.5%-5.75% before the end of the year due to the slow progress on reducing price pressures.
Daly believes that the Fed’s rate-hike pace has already slowed down, as the institution went from raising rates in 75-basis-point increments for the majority of last year to a half-point increase in December and quarter-point increases this year.
Daly is still unsure about what will happen after that, which is the Fed meeting in late July. It will rely on what she discovers from her contacts in the neighborhood and in business, as well as from official economic statistics. “I believe it is smart to maintain optionality, thus I wish to do that,” said Daly.
The major problems facing her neighborhood advisory committee and other business contacts are excessive inflation and persistent labor shortages.
The personal consumption expenditures index, the Fed’s favored gauge of inflation, is currently at 4.4%, down from a peak of 7% last summer but still beyond the Fed’s 2% target.
The unemployment rate has risen to 3.7%, although it is still lower than the 4% rate that Fed policymakers believe is consistent with a sustainably fully employed American workforce.
Daly added that concerns about the property market bottoming out and future rent increases are also prevalent. She said that other statistics, including a fall in short-term inflation expectations as well as decreases in both the frequency and size of price changes by businesses, suggest that inflation is still moving in the correct direction.
