Fed officials signal interest rates may need to go higher than expected

A chorus of Federal Reserve officials are laying the need for additional interest rate hikes in coming months, including the possibility of a higher-than-expected peak, amid signs of underlying inflationary pressures in the U.S. economy.

In separate speeches and interviews this week, several policymakers hammered home a hawkish message: While they welcome recent declines in inflation, they warn that the Fed still has a ways to go in its fight to wrangle prices under control.

"We have farther to go," Fed Governor Christopher Waller said in prepared remarks before the Arkansas State University Agribusiness Conference. "And it might be a long fight, with interest rates higher for longer than some are currently expecting. But I will not hesitate to do what is needed to get my job done."

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The Fed last week voted to raise its benchmark interest rate another quarter percentage point to a range of 4.5% to 4.75% and signaled that a "couple more" increases are on the table this year. But the astonishingly strong January jobs report has prompted some traders to reexamine their rate-hike expectations for the year, with some investors betting the Fed could raise rates as high as 6% by the end of 2023.

That's because the hiring surge in January has complicated the Fed's fight to lower prices and tame inflation, some of which stems from the imbalanced labor market. Employers added a whopping 517,000 new jobs last month – nearly triple what Wall Street expected – while the unemployment rate dropped to 3.4%, a rate not seen since May 1969. The Labor Department also revised the job figures in November and December higher, suggesting the economy entered the new year with more momentum than initially thought.

Minneapolis Fed President Neel Kashkari said Tuesday that the blowout jobs report is evidence the Fed needs to do more to combat inflation. A voting member of the Federal Open Market Committee (FOMC) this year, Kashkari sees rates rising to 5.4% this year.

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"We have a job to do. We know that raising rates can put a lid on inflation," he told CNBC's "Squawk Box." "We need to raise rates aggressively to put a ceiling on inflation then let monetary policy work its way through the economy."

That sentiment was echoed by Atlanta Fed President Raphael Bostic, who indicated that officials may need to increase rates to a higher peak than previously expected if the strong economy persists.

"It’ll probably mean we have to do a little more work," Bostic, who is not a FOMC voting member this year, told Bloomberg News. "And I would expect that that would translate into us raising interest rates more than I have projected right now."

Projections from the Fed's December meeting show that most officials expect rates to peak around 5.1%, which would imply quarter-point increases at their March and May meetings. No officials forecast rate cuts this year.

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Fed Chairman Jerome Powell has repeatedly said that officials are willing to go higher if the data suggests the economy is still too high, a message he reiterated on Tuesday during a question-and-answer session at the Economic Club in Washington, D.C.

"We’re going to react to the data," Powell said. "So, if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than has been priced in."