1 min read.Updated: 14 Jan 2022, 01:12 PM ISTNick Timiraos, The Wall Street Journal
Central bank official says three interest-rate increases this year are an appropriate baseline
A Federal Reserve official warned that the central bank would have to move interest rates up more aggressively this year if inflation stays high through the first half of the year.
Fed governor Christopher Waller said he still thought it was reasonable to pencil in three rate increases this year, but that the rate path would ultimately depend on “what inflation looks like in the second half of the year. If it continues to be high, the case will be made for four, maybe five hikes," he said in an interview on Bloomberg TV. “But if inflation falls back in the second half of the year, as many of us think it will…then you could actually pause and not even go the full three."
Mr. Waller said he thought it would be appropriate to begin raising the Fed’s benchmark rate by a quarter percentage point at the central bank’s policy meeting in March, by which time the Fed will have ended its bond-buying stimulus program.
Brisk demand for goods, disrupted supply chains and various shortages have pushed 12-month inflation to its highest readings in decades. Core consumer prices, which exclude volatile food and energy categories, were up 4.7% in November from a year earlier, according to the Fed’s preferred gauge. That is well above the Fed’s 2% target.
The Fed official also said that the large increase in inflation last year had complicated the central bank’s new framework, which seeks to target 2% inflation over time by taking into account prior deviations from that target. The framework was designed to address the environment that prevailed before the Covid-19 pandemic, in which the Fed and other central banks had struggled to boost inflation.
“This kind of caught us off guard, these high numbers and what it implies for our policy and our policy framework," he said.
The pandemic is “really throwing a wrench into how we want to think about things going forward, and so there might come a time" when the Fed would have to reconsider its new framework if inflation stayed high.
Mr. Waller dismissed a question about whether the central bank should consider a larger, half-percentage-point increase. “One of our key themes has been not to surprise markets," he said. Even though a large rate increase could be “in the tool kit" he said, “it would take a lot for us to move in that direction."
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