Fed Official Says 0.75-Point Rate Rise Seems Most Likely in July

By Helen Gray On Jul 14, 2022

A Federal Reserve official who has favored aggressive rate increases this year said he would favor a 0.75-percentage-point rate rise at the central bank’s meeting in two weeks—though stronger economic data between now and then could tip the scale in favor of an increase of a full percentage point.

The Labor Department reported Wednesday that inflation rose to 9.1% in June from a year before, the fastest pace in more than 40 years. The consumer-price index revealed a broadening in price pressures even after accounting for large gains in food and energy prices last month.

The Federal Reserve’s main tool for managing the economy is to change the federal-funds rate, which can affect not only borrowing costs for consumers but also shape broader decisions by companies like how many people to hire. WSJ explains how the Fed manipulates this one rate to guide the entire economy. Illustration: Jacob Reynolds

The report was “a major league disappointment,” said Fed governor

Christopher Waller

in remarks prepared for delivery Thursday at a conference in Victor, Idaho.

“With the CPI data in hand, I support another 75-basis-point increase,” at the Fed’s July 26-27 meeting, Mr. Waller said. But he said that depends on incoming data, including reports due Friday morning on retail sales and consumers’ inflation expectations and on housing activity later this month.

“If that data come in materially stronger than expected it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down,” he said.

As inflation climbs in the U.S., rising food and energy costs have pushed the nation’s most popular price index to its highest level in four decades. WSJ’s Gwynn Guilford explains how the consumer-price index works and what it can tell you about inflation. Illustration: Jacob Reynolds

Fed Chairman

Jerome Powell

said last month the central bank was likely to consider raising its benchmark federal-funds rate by either a half percentage point or 0.75 point, or 75 basis points, at the July meeting after it raised it that amount in June, the largest increase since 1994. The Fed hasn’t raised interest rates by a full percentage point since it began using the fed-funds rate as its primary tool for setting monetary policy in the early 1990s.

After Wednesday’s inflation report, investors in interest-rate futures markets and some analysts judged that the central bank would approve a one-percentage-point rate increase at its meeting in two weeks. The probability of a one-point increase rose to around 79% on Wednesday, up from around 12% before the report, according to CME Group.

Fed officials are set to begin their premeeting quiet period on Saturday, leaving little time to shape expectations around their monetary-policy plans.

Three Fed officials who spoke Wednesday didn’t say whether they would favor such a move, but they didn’t rule it out. “Everything is in play,” Atlanta Fed President

Raphael Bostic

told reporters in Florida. A fourth official, San Francisco Fed President

Mary Daly,

said she was leaning towards a 0.75-point increase but that a larger rate rise was possible.

Mr. Waller said he anticipated that by raising the fed-funds rate by 0.75-point this month, which would lift the target to a range between 2.25% and 2.5%, the Fed would be close to a neutral rate that neither stimulates nor restricts demand.

Mr. Waller said he expected further rate rises would be needed after that to slow demand for products and labor to bring down inflation. While some commentators have suggested that the neutral rate is higher because inflation is so far above the Fed’s 2% target, Mr. Waller said that thinking “rests on a flawed idea of how monetary policy affects spending decisions.”

Because spending decisions that require debt are based on an outlook that extends several years, Mr. Waller said it was better to think about a neutral interest rate that is tied to the expected path of both interest rates and inflation over the next several years.

Mr. Waller said he preferred to judge the inflation-adjusted or “real” fed-funds rate based on market-based estimates of inflation and the fed-funds rate at 12 to 18 months in the future. Right now, those measures imply a real fed-funds rate of 0.7% by the middle of next year and 1% by mid-2024. “This gives me some confidence that tightening now anticipated by markets and expected by [Fed officials] will be sufficient to reduce demand and inflation,” he said.

At the same time, Mr. Waller pushed back against critics who are worried the central bank is overdoing rate increases. Even if inflation is being aggravated by supply bottlenecks and other issues outside of the Fed’s control, he said the central bank couldn’t distinguish between the causes of inflation.

In writing the Fed’s mandate, “Congress did not say, ‘Your goal is price stability unless inflation is caused by supply shocks, in which case you are off the hook,’” said Mr. Waller. “We want to reduce excessive inflation, whatever the source” because rising prices distort economic activity and can lead to even longer-lasting high inflation.

Write to Nick Timiraos at [email protected]