By Chris Dorrell
A rate-setter at the US Federal Reserve raised the possibility that interest rates could be raised even higher if progress on defeating inflation was not maintained.
At an event in London, Michelle Bowman, a rate-setter at the Fed, said she was “willing to raise” interest rates again “should progress on inflation stall or even reverse”.
Bowman is one of the more hawkish officials among the Fed’s 19 rate-setters and she did not think that a rate rise was a likely situation.
Nevertheless, she warned that there were still “upside risks” to inflation, including that looser financial conditions could “add momentum to demand, stalling any further progress or even causing inflation to accelerate”.
The Fed maintained interest rates at their highest level in 23 years at its last meeting earlier this month, citing the “modest” progress made on inflation.
Alongside its latest decision, the Fed released its latest set of ‘dot-plot’ projections, which signalled that policymakers only expect to cut rates once this year, down from three back in March.
Inflation has remained frustratingly persistent over the past year, having fallen as low as three per cent last summer. Since then it has mainly moved sideways, although the most recent batch of data undershot economists’ expectations with the headline rate falling to 3.3 per cent in May.
Markets will be keeping a close eye on the latest personal consumption expenditure (PCE) figures due out on Friday.
According to CME’s Fedwatch tool, there is a roughly 60 per cent chance that interest rates will be cut in September.
The European Central Bank has already started its cutting cycle while Bank of England officials edged closer to an August cut in last week’s meeting. Bowman argued that the US was suffering from very different inflationary pressures.
“Inflation and labour market developments in the US have unfolded differently in recent quarters compared to many other advanced economies, likely reflecting a more open immigration policy and significantly larger discretionary stimulus since the pandemic,” she said.
