More rate hikes ‘likely’ needed to lower inflation: Fed official

A US central bank official said Saturday that more interest rate hikes “will likely be needed” to bring inflation down further, shortly after policymakers lifted rates to the highest level since 2001.

Federal Reserve governor Michelle Bowman’s prepared remarks to an event in Colorado also came after a mixed employment report on Friday showing that hiring in the United States has slowed but wage gains remained robust.

Bowman said she supported the policy-setting Federal Open Market Committee’s (FOMC) decision for a rate hike in July given “strong economic data and still elevated inflation.”

“I also expect that additional rate increases will likely be needed to get inflation on a path down to the FOMC’s two percent target,” she added in her remarks.

On Friday, Labor Department data showed that the world’s biggest economy added 187,000 jobs in July and 185,000 in June -- slowing from before.

But wage gains held steady at 0.4 percent, and were 4.4 percent higher than the same period a year ago in July.

Analysts noted that this could still be too elevated for the Fed.

“The demand for workers continues to exceed the supply of available job seekers, adding upward pressure on prices,” said Bowman in her Saturday speech.

She added that she would be seeking “consistent evidence” that inflation is on a meaningful path down toward the Fed’s two percent target, when mulling how long the federal funds rate needs to remain restrictive.

“I will also be watching for signs of slowing in consumer spending and signs that labor market conditions are loosening,” she said.

Officials are expected to assess the labor market report for August, along with upcoming inflation readings, before making their next rate decision in late September.

Federal Reserve policymakers received new evidence on Friday that the labor market is cooling, adding to the case that the US central bank’s recent interest rate hike could be the last of its current tightening cycle.

The Fed has raised rates at 11 of its last 12 policy meetings in its effort to beat back inflation, with a quarter-percentage-point increase on July 26 pushing its benchmark overnight interest rate to the 5.25%-5.50% range.

The tightening campaign has contributed to a slowdown in inflation. The consumer price index rose 3% in June from a year earlier, down from about triple that pace last summer.

Data on Friday showing the US added 187,000 jobs last month, below economists’ expectations in a Reuters poll, may be another sign that the effort is working. The average work week also shrank, an indication of easing labor demand.

“I expected the economy to slow down in a fairly orderly way, and this number 187,000 comes in continuing that pace,” Atlanta Fed President Raphael Bostic told Bloomberg Television.

Other parts of the Labor Department report were less encouraging for FED policymakers counting on a labor market softening to put more downward pressure on inflation. Average hourly earnings rose 4.4% from a year earlier for the fourth straight month and the unemployment rate edged down to 3.5%.

Chicago Fed President Austan Goolsbee, who has argued that wage growth is a product of high inflation rather than a contributor to it, said Friday’s jobs report was one of several recent data points that show labor supply and demand are coming into better balance.

“We’ve gotten inflation down a fair amount without increasing the unemployment rate,” he told Bloomberg Television, adding that it makes him hopeful the Fed can ease price pressures without causing a recession.

The central bank has not often managed that kind of “soft landing,” but Goolsbee and others have argued the coronavirus pandemic and the policy response it produced were highly unusual, changing consumer behavior and crippling supply chains in ways that caused inflation to surge but which are now beginning to fade.

Traders of contracts tied to the Fed’s policy rate now see less than a 30% chance of another rate hike by the end of this year, down from about a 35% chance before Friday’s jobs report.

“I think overall this still does point to a labor market that is slowly but steadily heading toward a soft landing,” said Daniel Zhao, lead economist at Glassdoor.

There are several more key data releases that will shape Fed policymakers’ views before the next policy meeting in September.

“Officials will want to see the August employment report and the next two inflation monthly readings before deciding whether they can remain on hold or if further rate hikes are required to cool labor demand and inflationary pressures,” wrote Kathy Bostjancic, chief economist at Nationwide.