WASHINGTON (AP) — The Federal Reserve will have to keep raising its benchmark interest rate to a point that raises unemployment and lowers inflation from unusually high levels, two officials said in separate remarks Monday.
Susan Collins, the new president of the Federal Reserve Bank of Boston, endorsed the Fed’s projections released last week that indicated its benchmark interest rate would rise to 4.6% by next year, in sharp rise from around 3.1% currently.
Lower inflation “will require slower job growth and somewhat higher unemployment,” Collins said in a speech to the Greater Boston Chamber of Commerce.
Later Monday, Cleveland Fed Chair Loretta Mester said the Fed’s short-term rate is likely to stay higher for longer than expected regardless of the uncertainties surrounding the economy, such as the invasion from Ukraine by Russia and ongoing supply chain difficulties.
“When there is a lot of uncertainty, it may be better for policymakers to act more aggressively, because aggressive action and preemptive action can prevent the worst outcomes from happening,” she said. declared.
Mester also said she expects higher interest rates to raise unemployment, but disagrees with Bank of America’s forecast that the jobless rate will rise to 5.5. %.
“I expect the unemployment rate to go up, but not that much,” she said.
The two officials’ comments added to an ongoing debate about how badly the Federal Reserve’s rate hikes — the fastest in more than 40 years — will hurt the economy. By raising its benchmark rate, the Fed is driving up the cost of a wide range of consumer and business loans, including mortgages, auto loans and credit cards.
Collins said that as concerns grow about a recession, “the goal of a more modest, albeit challenging, downturn is achievable.”
Also on Monday, stocks fell for the fifth day in a row and long-term interest rates rose amid growing fears of a global recession. The 10-year Treasury yield, which influences mortgage rates, jumped from 3.69% to 3.89%.
Fed officials are hoping their rate hikes will provide a “soft landing” by slowing consumer and business spending enough to bring inflation down, but not so much as to trigger a recession.
Yet many economists are increasingly skeptical of the likelihood of such an outcome. The Fed raised its key rate to a range of 3% to 3.25%, the highest in 14 years, even as the US economy has already slowed. This could cause a recession in the United States next year, economists fear.
In a question-and-answer session after his speech, Collins also said that inflation, which hit 9.1% in June from a year earlier and has since fallen to 8.3%, “has maybe peaked.
But Mester said she had seen no such signs.
“Before concluding that inflation has even peaked, I’m going to have to see several months of falling readings,” she said.
At a policy meeting last week, the Fed raised its short-term rate by three-quarters of a point for the third time in a row. Hikes are usually a quarter point smaller. Fed Chairman Jerome Powell at a press conference after the meeting said “the chances of a soft landing are likely to diminish” as the Fed steadily raises borrowing costs.
“No one knows if this process will lead to a recession or, if so, how big that recession would be,” Powell said.
A challenge for the Fed is that last week it also released its quarterly economic and interest rate projections. They showed that Fed policymakers expect unemployment to hit 4.4% by the end of next year, up from 3.7% currently.
According to a rule of thumb discovered by economist Claudia Sahm, every time since World War II that unemployment has increased by half a percentage point over several months, a recession has followed.
Collins is one of 12 voting members of the Fed’s policy-making committee and is the first black woman to serve as chairwoman of a regional Fed bank. She was sworn in on July 1. Collins previously served as provost and executive vice president at the University of Michigan and served on the board of the Chicago Fed.
Atlanta Fed Chairman Bostic in an interview Sunday on CBS News’ “Face the Nation” also said “we need to slow down” to get inflation under control.
“But I think we’re going to do everything we can at the Federal Reserve to avoid deep, deep pain,” he added.
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