Fed Official Says Hotter Data Will Warrant Higher Rates

Mr. Waller didn’t say in his prepared remarks whether he would continue to favor raising interest rates by a quarter-percentage point, which was his preference at the Fed’s last meeting, or whether he would instead support a larger half-point increase at its next gathering, March 21-22.

The Fed’s rate-setting committee voted unanimously last month to slow rate increases by lifting their benchmark federal-funds rate by a quarter percentage point—to a range between 4.5% and 4.75%—following larger moves of a half point in December and 0.75 point in November.

At their December meeting, most Fed officials projected lifting the rate to between 5% and 5.5% this year to combat high inflation by slowing economic activity. So far, three officials out of 18 who participate in policy-setting deliberations have suggested they would have favored an increase of a half-percentage-point at the recent meeting or could support such a move this month.

Since Fed officials’ recent meeting that concluded on Feb. 1, the government released reports showing stronger hiring and spending in January than forecast, along with slower progress on reducing inflation.

The unemployment rate fell to 3.4% in January, a 53-year low, surprising economists who have long anticipated that Fed rate increases would cool the economy soon. Economic growth also has rebounded in Europe, further easing worries of a global recession this year.

Inflation’s decline late last year stalled in January, and data revisions further indicated the drop in recent months wasn’t as swift as initially reported. The 12-month inflation rate, excluding volatile food and energy items, was 4.7% in January, up from 4.6% in December, as measured by the Commerce Department’s personal-consumption-expenditures price index.

Recent data shows consumer spending isn’t slowing as much as anticipated, that the job market “continues to run unsustainably hot, and that inflation is not coming down as fast as I had thought,” said Mr. Waller on Thursday. “It could be that progress has stalled, or it is possible that the numbers released last month were a blip, perhaps associated with unusually favorable weather, and that forthcoming data will show that economic activity and inflation resumed their decline.”

Mr. Waller said he would see little need to change plans to raise the fed-funds rate to between 5% and 5.5% this year if coming Labor Department reports show that job growth slowed in February to the levels of late last year and inflation reversed its acceleration in January.

“On the other hand, if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released,” he said.

Separately, Atlanta Fed President

Raphael Bostic

told reporters Thursday that he “still very firmly” supports raising rates in quarter-point increments as officials determine just how high rates should rise to restrain economic activity. “Slow and steady in this is going to be the appropriate course of action,” he said.

Mr. Bostic highlighted the lagged effect of past interest-rate increases and said he expected them to become a more serious drag on activity this spring. “It’s been only relatively recently that our policy has been [in] a formally restrictive space,” he said.

The Fed raises rates to combat inflation by slowing the economy through tighter financial conditions—such as higher borrowing costs, lower stock prices and a stronger dollar—that curb demand.

Stronger growth has led investors to radically rethink the policy outlook for the coming year. Investors in interest-rate futures markets now expect the Fed to lift the fed-funds rate by a quarter point at each of its next three meetings, to around 5.4% by June, and see a 50% chance of another quarter-point increase in July, according to CME Group. They expect rates to end the year around those levels.

At the time of the Fed’s most recent meeting, Jan. 31-Feb. 1, those investors anticipated the Fed would raise rates to 4.9% by March and then cut them around year’s end.

Write to Nick Timiraos at [email protected]

Mr. Waller didn’t say in his prepared remarks whether he would continue to favor raising interest rates by a quarter-percentage point, which was his preference at the Fed’s last meeting, or whether he would instead support a larger half-point increase at its next gathering, March 21-22.

The Fed’s rate-setting committee voted unanimously last month to slow rate increases by lifting their benchmark federal-funds rate by a quarter percentage point—to a range between 4.5% and 4.75%—following larger moves of a half point in December and 0.75 point in November.

At their December meeting, most Fed officials projected lifting the rate to between 5% and 5.5% this year to combat high inflation by slowing economic activity. So far, three officials out of 18 who participate in policy-setting deliberations have suggested they would have favored an increase of a half-percentage-point at the recent meeting or could support such a move this month.

Since Fed officials’ recent meeting that concluded on Feb. 1, the government released reports showing stronger hiring and spending in January than forecast, along with slower progress on reducing inflation.

The unemployment rate fell to 3.4% in January, a 53-year low, surprising economists who have long anticipated that Fed rate increases would cool the economy soon. Economic growth also has rebounded in Europe, further easing worries of a global recession this year.

Inflation’s decline late last year stalled in January, and data revisions further indicated the drop in recent months wasn’t as swift as initially reported. The 12-month inflation rate, excluding volatile food and energy items, was 4.7% in January, up from 4.6% in December, as measured by the Commerce Department’s personal-consumption-expenditures price index.

Recent data shows consumer spending isn’t slowing as much as anticipated, that the job market “continues to run unsustainably hot, and that inflation is not coming down as fast as I had thought,” said Mr. Waller on Thursday. “It could be that progress has stalled, or it is possible that the numbers released last month were a blip, perhaps associated with unusually favorable weather, and that forthcoming data will show that economic activity and inflation resumed their decline.”

Mr. Waller said he would see little need to change plans to raise the fed-funds rate to between 5% and 5.5% this year if coming Labor Department reports show that job growth slowed in February to the levels of late last year and inflation reversed its acceleration in January.

“On the other hand, if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released,” he said.

Separately, Atlanta Fed President

Raphael Bostic

told reporters Thursday that he “still very firmly” supports raising rates in quarter-point increments as officials determine just how high rates should rise to restrain economic activity. “Slow and steady in this is going to be the appropriate course of action,” he said.

Mr. Bostic highlighted the lagged effect of past interest-rate increases and said he expected them to become a more serious drag on activity this spring. “It’s been only relatively recently that our policy has been [in] a formally restrictive space,” he said.

The Fed raises rates to combat inflation by slowing the economy through tighter financial conditions—such as higher borrowing costs, lower stock prices and a stronger dollar—that curb demand.

Stronger growth has led investors to radically rethink the policy outlook for the coming year. Investors in interest-rate futures markets now expect the Fed to lift the fed-funds rate by a quarter point at each of its next three meetings, to around 5.4% by June, and see a 50% chance of another quarter-point increase in July, according to CME Group. They expect rates to end the year around those levels.

At the time of the Fed’s most recent meeting, Jan. 31-Feb. 1, those investors anticipated the Fed would raise rates to 4.9% by March and then cut them around year’s end.

Write to Nick Timiraos at [email protected]