Federal Reserve Governor Christopher Waller said he supports raising interest rates by 75 basis points this month for a second straight meeting and “probably” a 50 basis-point hike at the following gathering in September, dismissing concerns that the U.S. economy is starting to slump.
“We need to move to a much more restrictive setting” and do that “as quickly as possible,” Waller said Thursday in a webcast hosted by the National Association for Business Economics.
Regarding the idea that higher borrowing costs risk pushing the U.S. economy into recession, Waller stressed the need to tame red-hot inflation. “Inflation is a tax on economic activity,” he said. Fears of a recession are “overblown.”
Waller had previously said the central bank is “all in” on the inflation fight, and has backed another 75 basis-point interest-rate increase when the Federal Open Market Committee meets July 26-27. That would match the move it made last month, which was the biggest increase since 1994.
On Thursday he said he still sees a “good shot” that the economy will have a soft landing — meaning the Fed’s interest-rate hikes will bring down inflation without sparking a recession.
Minutes from the June FOMC meeting released on Wednesday showed central bankers prepared, if necessary, to combat the hottest inflation in 40 years by tightening policy even further than anticipated in their latest forecasts. Those projections, which were updated last month, see the Fed’s benchmark lending rate peaking in a range of 3.75% to 4% next year from a current of 1.5% to 1.75%.
Inflation according to the Fed’s preferred measure rose 6.3% in the 12 months through May — more than three times the Fed’s 2% target. A separate gauge of consumer prices is expected to show a 8.8% year-over-year increase in June, according to economists surveyed by Bloomberg News. The Labor Department report will be released on July 13.
Higher interest rates have slowed interest-sensitive sectors of the U.S. economy, such as home sales, and punished stock prices with the S&P 500 index down about 18% this year. But the economy still shows plenty of signs of growth. Economists estimate that nonfarm payrolls for June, for example, will rise by 265,000. The monthly employment report is published on Friday.
Such a number in that range would historically be regarded as “phenomenal,” Waller said. “This is a pretty spectacular labor market.”
In separate remarks on Thursday, St. Louis Fed President James Bullard repeated a warning that inflation expectations could become unhinged without “credible” action by the central bank. Without such action, that could lead “to a new regime of high inflation and volatile real economic performance,” Bullard said in slides prepared for a presentation in Little Rock, Arkansas.
