By Howard Schneider and Lindsay Dunsmuir
TAMPA, Fla. (Reuters) – Federal Reserve officials signaled on Friday they will likely stick with a 75-basis-point interest rate increase at their July 26-27 meeting, though a recent high inflation reading could still warrant more, or faster, increases later in the year.
St. Louis Fed President James Bullard said the “hot” 9.1% inflation reading for June warrants pushing the target federal funds rate to a range of between 3.75% and 4.00% by the end of this year, a half percentage point higher than his prior year-end aim.
“The Fed has to react … charting out a course that is somewhat more aggressive over the second half of this year,” Bullard said at an event organized by the European Economics & Financial Centre in London.
But he also said he was indifferent about whether the U.S. central bank should approve a 0.75-percentage-point rate increase this month, as policymakers have flagged, or boost that to a full percentage point.
“It probably doesn’t make too much difference to do 100 basis points here and less in the other three meetings (in 2022) or to do 75 basis points here and slightly more in the remaining three meetings of the year,” Bullard said.
In separate comments at a forum organized by the Tampa Bay Business Journal, Atlanta Fed President Raphael Bostic cautioned against the central bank moving “too dramatically” because it could undermine the strong hiring and other positive trends still seen in the economy.
While Bostic did not explicitly endorse a 75-basis-point increase at this month’s meeting, his comments seemed to lean away from a larger rate hike in July.
Their remarks are the last before policymakers enter a “blackout” period in which they are supposed to refrain from public statements in the week before the central bank’s policy-setting Federal Open Market Committee gathers in Washington.
Both Bostic and Bullard reiterated the Fed’s firm commitment to raising interest rates as high as needed to control inflation, with Bostic saying “if the economy moves in a way that is consistent with us getting to our 2% (inflation) target then we will stop. And if it doesn’t we won’t.”
Traders in futures contracts tied to the Fed’s short-term federal funds policy rate shifted their bets firmly in favor of a 0.75-percentage-point increase at the upcoming meeting following the two Fed officials’ remarks. Traders had been leaning toward a full-percentage-point jump since the Labor Department reported on Wednesday that consumer prices rose at an annual pace of 9.1% in June, the largest increase in more than four decades.
On Thursday, Fed Governor Christopher Waller also said a 0.75-percentage-point rate hike remained the base case for this month’s meeting, though he noted that could be trumped by further economic data.
Economic data released on Friday seemed to push against a rush to larger rate hikes.
Retail sales rebounded in June, though they were down slightly on an inflation-adjusted basis, while a New York Fed manufacturing index registered unexpected gains – evidence the economy was largely holding up in the face of the Fed’s three rate hikes this year.
Meanwhile, a closely watched measure of consumer inflation expectations improved in June, a welcome development for Fed officials worried they were losing control of the public inflation outlook and would need to act more aggressively to keep it “anchored.”
(Reporting by Howard Schneider and Lindsay Dunsmuir; Editing by Paul Simao)