Fed’s ‘soft landing’ hope lives on as it heads for another big rate hike

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WASHINGTON, Sept 8 (Reuters) – The Federal Reserve is “firmly committed” to fighting inflation and remains hopeful that it can be done without the “very high social costs” involved in previous campaigns to control the surge prices, Fed Chairman Jerome Powell said Thursday. , in remarks echoed by other U.S. central bankers as they mull another potentially outsized interest rate hike.

Powell, in a 40-minute webcast interview with Cato Institute President Peter Goettler, was not asked about the U.S. central bank’s policy meeting later this month when it is expected to increase its target interest rate of half or three quarters of a percentage. point, and the Fed chief offered no information on his preference.

However, investors in contracts linked to the Fed’s key rate are currently pricing in a bigger 75 basis point hike, an expectation that rose during the day after the European Central Bank raised its key rate by three-quarters. percentage point drop in weekly jobless claims in the US underscored continued strength in the labor market, and a generally dovish Fed official signaled he was open to the idea.

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The Fed “could very well do” a 75 basis point hike at its September 20-21 meeting, said Chicago Fed President Charles Evans, who has tended to be on the dovish side of debates over monetary policy. It would mark the third consecutive increase of such magnitude and push the Fed’s target interest rate above 3% for the first time since 2008.

“We’re going to have a conversation about it,” Evans said. “I will listen to everyone. My decision is not made.”

Powell’s remarks on Thursday were his last scheduled before the start of a blackout period on Saturday ahead of the September meeting, during which Fed officials refrain from making policy statements. The fact that Powell in particular has not openly discounted the likelihood of a larger rate hike has led some analysts to conclude that it was anything but a done deal.

“Chair Powell has not pushed back market prices,” Bank of America economists observed in a note Thursday. “We now expect a rate hike of 75 basis points in September,” versus a half-percentage-point increase previously.

The difference may be largely symbolic, as a larger rate hike this month could mean smaller increases later in the year.

But it would demonstrate what Powell and his colleagues have made of the Fed’s central message: that they will not back down from planned rate hikes even at the risk of slowing growth and rising unemployment. “We have to act now, frankly, firmly like we have, and we have to keep going until the job is done,” Powell said. “The Fed has and accepts responsibility for price stability.”

The Fed’s monetary policy meeting this month will include updated economic projections as well as almost certain approval of a fifth straight increase in the target federal funds rate.

The publication of a monthly report on consumer price inflation in the United States next week will be the last major data that policymakers will have to assess to make this decision. While news since the July 26-27 Fed meeting has given a small sense that the pace of inflation may be slowing from 40-year highs, that hasn’t been enough to convince policymakers. that he has peaked. Read more

The labor market, meanwhile, remains strong, with an Atlanta Fed wage tracker showing profits through August rose at an annual rate of 5.7%, a rate some policymakers politicians consider incompatible with the Fed’s 2% inflation target.

In addition to market-based expectations, more economists are also predicting a 75 basis point increase this month. Jefferies and Nomura economists also changed their previous view on Thursday that the Fed would move to a half-percentage-point hike after larger increases in June and July, following Goldman Sachs economists on Wednesday. .

“The United States is in the luxurious position of a still strong labor market … there is a very good chance that the Fed can bring inflation down without causing a significant recession,” said Oliver Pursche, vice chairman. senior at Wealthspire Advisors in New York. “The economy and the labor market can absorb a 75 basis point hike.”

VOLCKER’S SHADOW

The question facing officials is how high and how fast borrowing costs need to rise to control the worst inflation spike since the 1980s, and whether monetary tightening can be achieved without triggering a recession. and a sharp increase in unemployment.

New research has recently suggested that this hopeful scenario is out of reach, with the unemployment rate set to double from the current 3.7% on reliably lower inflation. Read more

Updated Fed projections due out at the end of this month’s policy meeting will show whether officials now also see a risk of rising unemployment.

Powell said he continued to hope it could be avoided, as did Fed Vice Chairman Lael Brainard in his comments Wednesday.

Evans said he believed it wouldn’t take a recession to bring inflation under control and the unemployment rate might only rise to 4.5%, a view shared by his more hawkish colleague, Cleveland Fed President Loretta Mester.

Fed Governor Chris Waller, also a proponent of the idea that unemployment doesn’t have to rise dramatically for inflation to fall, is due to speak on Friday, as is the Fed Chair. of Kansas City, Esther George.

Referring to former Fed Chairman Paul Volcker’s fight against inflation in the early 1980s, when Fed policy triggered a recession and the unemployment rate topped 10%, Powell said noted that Volcker was trying to uproot years of rising inflation expectations that fueled higher prices and wages.

Volcker, who has been widely credited with winning that battle, “followed several failed attempts” by former Fed chiefs to bring inflation down, Powell said.

Powell said that because inflation expectations this time remain largely anchored around the central bank’s 2% target, the outcome could be better.

“We think we can avoid the kind of very high social costs that Paul Volcker and the Fed had to put in play” in the 1980s, Powell said.

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Reporting by Howard Schneider Additional reporting by Ann Saphir, Lindsay Dunsmuir and Stephen Culp; Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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