Interest rates

Interest rates could rise more than traditional quarter point, says US Fed governor

Federal Reserve Governor Michelle Bowman said on Monday she was open to raising interest rates by more than the traditional quarter point at the next central bank meeting in March.

Bowman’s comments came after several officials on Friday pushed back on the idea of ​​a half-point hike in the Fed’s benchmark short-term interest rate. The Fed wants to hike rates as inflation climbed to 7.5% in January from a year earlier, the largest increase in four decades.

The debate over how quickly to raise interest rates is being watched closely by financial markets and could also have an impact on the broader economy. Many economists have said the Fed moved too slowly in response to a persistent and unexpected spike in prices, raising the risk that inflation will remain elevated. But if it raises rates too quickly, the Fed risks stifling growth and hiring.

The bank is almost certain to start raising interest rates at its March 15-16 meeting, with most officials who expressed their views backing a quarter-point hike. However, James Bullard, chairman of the Federal Reserve Bank of St. Louis, has expressed support for a half-point hike at the Fed’s next three meetings.

Any increase next month would be the first since 2018.

FILE – A view of the Marriner S. Eccles Federal Reserve Building January 26, 2022 in Washington, DC.

Bowman said in prepared remarks to an American Bankers Association conference in Palm Desert, Calif., that she supports raising rates next month and that “if the economy develops the way I expect, increases in additional rates will be appropriate in the coming months”.

“I will be watching the data closely to judge the appropriate size of a raise at the March meeting,” she added, suggesting she is open to a half-point increase.

Fed rate hikes typically drive up borrowing costs for consumers and businesses, slowing economic growth. Average mortgage rates have already reached nearly 4%the highest since 2019, as markets moved in anticipation of Fed hikes.

Before joining the Fed’s board in 2018, Bowman was Kansas’ chief banking regulator and was not a dominant voice on Fed interest rate policies. Yet as Fed governor, she has a permanent vote on interest rates, and three of the seven governor seats are now vacant.

Bowman also said “inflation is far too high” and “is a heavy burden on all Americans, but especially those of limited means who are forced to pay more for everyday items, delay their purchases or carry over their savings for the future”.

She said rising prices are likely to continue through the first half of the year, and may ease in the second half, “but there is a substantial risk that high inflation will persist.”

Disrupted supply chains have slowed the production of goods like cars, furniture, appliances and electronics, even as demand for these items soared, a major reason for rising inflation. Bowman acknowledged the Fed couldn’t do anything about supply issues, but said it could respond to strong demand by ending its ultra-low interest rate policies that ‘are no longer needed’ .

New York Fed Chairman John Williams said on Friday he “sees no compelling case for making a big move early” in rate hikes, indicating he backs a quarter-point hike on next month.

Most economists expect six or seven rate hikes this year, which would be a faster pace than the last time the Fed tightened credit, from 2015 to 2018. Investors have forecast a 70% chance of at least six increases this year, according to the CME. Fed watch.

Fed Governor Lael Brainard said on Friday she expected the Fed to launch a “series of rate hikes” at its March meeting. She also said financial market expectations are “in line with” the Fed’s plans, suggesting she supports investors’ view that there will be six rate hikes this year.

The Fed also said it would start cutting its $9 trillion in bonds later this year, which would likely push interest rates higher.

Brainard and Williams are considered part of a “troika” of close advisers to Fed Chairman Jerome Powell.