Fed presidents signal more interest rate hikes needed to cool inflation

A chorus of Federal Reserve officials are opening the door to at least one more interest rate hike in coming months amid signs of underlying inflationary pressures in the U.S. economy.

In separate speeches and interviews this month, several policymakers hammered home a hawkish message: While they welcome recent declines in inflation, they warn that inflation still remains too high for a pause in the central bank's tightening campaign. 

"I think we’re going to have to grind higher with the policy rate in order to put enough downward pressure on inflation and to return inflation to target in a timely manner," St. Louis Federal Reserve President James Bullard said in a Monday speech delivered to the American Gas Association in Florida. "I’m thinking two more moves this year – exactly where those would be this year I don’t know – but I’ve often advocated sooner rather than later."

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Investors have been betting that the Fed would take a break in raising rates at its June meeting after policymakers approved a 10th increase in May, lifting the federal funds rate to a range of 5% to 5.25%, the highest since 2007.

But the hawkish comments from Bullard, as well as Minneapolis Fed President Neel Kashkari, have raised the specter of an 11th rate hike in June. 

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Kashkari, a voting member of this year's policy-setting Federal Open Market Committee, said Monday that he is not taking future rate hikes off the table, even if officials choose to pause the increases next month.

"I think right now it’s a close call, either way, versus raising another time in June or skipping," he said during an interview with CNBC. "What’s important to me is not signaling that we’re done." 

Kashkari added: "If we were to skip in June that does not mean we’re done with our tightening cycle, it means to me we’re getting more information. Do we then start raising again in July, potentially?" he said.

The probability that the Fed hikes its rates in June by a quarter-percentage point jumped to 26.8% on Monday afternoon – up from 17.4% the previous week, according to data from the CME Group's FedWatch tool, which tracks trading. 

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Dallas Fed President Lorie Logan also indicated last week that inflation remains "much too high" and is not cooling quickly enough to justify a pause in the tightening cycle next month. 

"After raising the target range for the federal funds rate at each of the last 10 FOMC meetings, we have made some progress," she said in remarks prepared for delivery to the Texas Bankers Association in San Antonio. "The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet."

Although inflation has eased from a peak of 9.1%, it remains about more than double the pre-pandemic average and well above the Fed's 2% target rate. On top of that, the labor market remains uncomfortably tight, with unemployment recently falling to 3.4% – the lowest rate since 1969.

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"This week's Fedspeak chorus is on point to remind markets that the Fed's mandate is to restore price stability, and it's prepared to raise rates again to get the job done if inflation doesn't cooperate," said Quincy Krosby, chief global strategist for LPL Financial.