Fed could use half-point rate rises if needed, says official

The Fed could supersize a rate increase to half a percentage point if inflation remains stubbornly high, a leading US central bank official said.

Raphael Bostic, president of the Fed’s Atlanta branch, stuck to his call for three quarter-point interest rate increases in 2022, with the first coming in March, in an interview with the Financial Times. But he said a more aggressive approach was possible if warranted by the economic data.

That could mean rate rises at each of the seven remaining policy meetings in 2022, or even the possibility of the Fed increasing the federal funds rate by half a percentage point, double its typical amount and a tool it has not used in roughly two decades.

“Every option is on the table for every meeting,” Bostic said on Friday. “If the data say that things have evolved in a way that a 50 basis point move is required or [would] be appropriate, then I’m going to lean into that . . . If moving in successive meetings makes sense, I’ll be comfortable with that.

“I do think that a view has emerged that we have some meetings that we really just dial it in and that there’s no ability of action at, and that’s just never been my mindset.”

He added that he would be watching closely for a deceleration in monthly consumer price gains and further evidence that rising wages are not feeding meaningfully into higher inflation when thinking about his forecast for interest rates. He said he was encouraged by the latest employment cost index (ECI) report, which was published on Friday and tracks wages and benefits paid out by US employers, and expects a moderation in wage growth going forward.

Bostic’s comments echo those of Jay Powell, chair of the central bank, who refused this week to rule out even the most forceful policy responses to quell inflation, which is running at the fastest pace in roughly 40 years.

Powell instead said the Fed would be “humble and nimble” as it looks to “move steadily away from” the ultra-easy monetary policy it put in place in early 2020 to shield the economy from the Covid-19 shock.

Market expectations have shifted as a result, with traders now pricing in one more quarter-point interest rate increase this year, for a total of five.

The Fed’s embrace of a much more hawkish stance has rattled global financial markets, leading to extreme volatility this month and steep losses for US stocks.

The Atlanta Fed chief expressed little concern about the recent gyrations, and said it was a natural response to a Fed that was beginning to withdraw its support.

“The reduction of accommodation should translate into tighter financial markets,” Bostic said. “The developments that we’ve seen on that front are comforting in the sense that markets are still functioning the way they’re supposed to, and they are responding to conditions in ways that are rational and appropriate.”

He said, however, that he was closely monitoring overnight borrowing markets, in particular, for signs of stress akin to the episode in 2018 when financial markets seized up as the Fed tightened monetary policy further despite fears of a growth slowdown.

Bostic, who also supports the Fed reducing its $9tn balance sheet “as quickly as” possible without impairing market functioning, said he was “optimistic” about how the economy was going to perform in the coming months, despite elevated inflation.

He also rejected claims that the Fed would raise interest rates far too aggressively and in a manner that would prove damaging.

“Our policy path is not a constriction path. It’s a less accommodative path,” he said. “If we do the three [interest rate increases] that I have in mind, that’ll still leave our policy in a very accommodative space.

“I don’t think there’s going to be a lot of constraint on growth as we remove these emergency actions.”