Fed Holds Rates Steady as Officials Signal More Hikes May Be Needed

By Greg Robb Dallas Fed President Lorie Logan sees at least 50 basis points of additional rate hikes. Without further increases, she said, inflation will not return to the Fed 2% target. Friday was the first day Fed officials could publicly discuss this week vote to leave interest rates unchanged. Two top officials said the central bank would need to raise rates in coming months to counter inflation pressures. The remarks underscored the absence of a settled public-communication strategy at the Fed on the economic outlook. Federal Reserve Chairman Kevin Warsh has been pulling back on commenting on how he views past data and future economic trends. Dallas Fed President Lorie Logan and St. Louis Fed President Roberto Musalem both said it is important for the Fed to explain its thinking to investors. In a speech at Davidson College, Logan, who voted Wednesday to keep rates unchanged, said the Fed needs at least two more quarter-point hikes. She estimates the fed funds target range is at least 50 basis points, or half a percentage point, below the level that would create modest restriction and begin to bring inflation back to target. Without at least two more quarter-point rate hikes, she added, inflation will keep trending above the Fed 2% target unless unexpected shocks, such as a downturn, occur. She said the Fed could pause after these moves and reassess the economic outlook. In September, the Fed raised rates by a quarter point to a range of 3.75% to 4%. It was the first hike in three years and signaled a reversal of the policy of trying to engineer a soft landing by slowly bringing down interest rates and inflation at the same time. At that meeting, 16 of 18 Fed officials penciled in another hike this year. Many economists noted that inflation data released after the September meeting was even hotter than before the Fed raised rates, and argued the Fed should have hiked again this week. The Federal Open Market Committee voted 10-2 to leave rates unchanged. At his press conference, Warsh said officials wanted to wait for more data before acting. Many economists criticized Warsh for not saying more about his views on the road ahead. They said they would look to officials such as Logan and Musalem for a sense of what may come. Logan explained that she supported the pause because raising rates gradually can help households, businesses and market participants adapt to higher rates and reduce the risk that economic activity deteriorates more sharply than necessary. She added that skipping a meeting does not change the monetary-policy destination. In a separate speech to economists in New York, Musalem also backed a plan to keep raising rates. He said his base case was that inflation will only come down if there are more rate hikes. He judged that additional firming of monetary policy will be necessary, and soon. Moving sooner in smaller steps while inflation expectations are anchored has a better chance of succeeding without adverse impact on the labor market or economic growth, he added. The next meeting of the Fed interest-rate committee is Dec. 8-9. Richmond Fed President Tom Barkin did not specifically say whether he would back more rate hikes when he spoke this week. Barkin noted there could be a case for higher rates if artificial-intelligence spending continued at a strong pace. If demand continues to surge, that would be the kind of thing you might want to lean against, he said. If we create a more productive economy and AI leads to much stronger growth, that is an economy that can handle higher interest rates, he said. Barkin also supported moving slowly on tightening. Gradual makes sense when you are not much behind the curve and want time to learn from the economic and external environment, he said. Greg Robb This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.