As US Federal Reserve officials become increasingly divided over raising interest rates, the solution is to skip June and raise rates again in July.
Dallas Fed President Lorie Logan said on May 18 that she was not ready to stop tightening altogether. “As of today, we are not close to the end of tightening,” she told bankers in San Antonio, explaining that core inflation was still rising. Her solution: Skip the rate hike next month.
Atlanta Fed President Raphael Bostic also said that not raising interest rates in June does not mean the Fed is done tightening. "There are still a lot of uncertainties in the world . We have to see how things play out, figure out what the real signals are, what the noise is. That's something we have to reassess every week," he explained.
Over the past year, Fed officials have raised interest rates 10 times, by a total of 5%. Yet inflation is still above the 2% target. Unemployment is at a multi-decade low of 3.4%.
Fed interest rate adjustments since 2006. Chart: Reuters
After a year of unity, views among Fed leaders are starting to diverge. Fed Board of Governors member Philip Jefferson said the full impact of tightening policies has yet to be felt in the economy .
The view is cautious amid concerns that recent banking turmoil and the debt ceiling battle will drag down the U.S. economy. U.S. lawmakers are still negotiating to raise the debt ceiling before a June 1 deadline to avoid default.
Several other Fed officials avoided giving clear policy signals at the June meeting. Still, they leaned toward the possibility of a pause in rate hikes.
Cleveland Fed President Loretta Mester and Fed Board of Governors Member Michelle Bowman, on the other hand, say the Fed still has work to do in its fight against inflation.
“We think the Fed is done raising rates. However, there is still a risk that they will raise rates in the summer,” said Michael Gapen, an economist at Bank of America.
Even if they don’t raise rates next month, Fed officials could still signal tightening if they want to. The March report showed the Fed expects rates to peak at 5.1%. They’re already at that level after the hike earlier this month. So if the agency raises its forecast, it would signal further tightening beginning in July.
The Fed’s meeting earlier this month was a turning point for the Fed. After raising interest rates by 25 basis points (0.25%), the Fed said it would carefully evaluate policy at each meeting. For now, officials are still waiting for more macroeconomic data.
"I think they will agree to skip the June rate hike. Skip, not stop. This is their way of telling the market that the Fed can still raise rates in July, unless inflation and growth cool down," said Tim Duy, an economist at SGH Macro Advisors.
Investors are still betting on a Fed rate hike at its mid-month meeting next month. Fed Chairman Jerome Powell could provide further clues at a Fed conference in Washington on May 19.
Ha Thu (according to Bloomberg)
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