The Federal Reserve should raise its key rate even higher than expected if a recent trend of unexpectedly strong job growth, consumer spending and inflation persists, a key Fed official said Thursday.
“Recent data suggests consumer spending isn’t slowing that much, the labor market is still functioning unsustainably, and inflation isn’t falling as fast as I thought it would,” the governor said. Fed, Christopher Waller, in remarks he planned to deliver at a meeting of the Mid-Size Bank Coalition of America.
“If these data reports continue to be too hot, the policy target range will need to be even higher this year to ensure we don’t lose the momentum that was in place prior to the January data release,” he said. Waller said.
Waller, a member of the Fed’s board of directors and its interest rate-setting committee, is seen as hawkish or more concerned with tackling growth-spurring inflation. But his recent views on inflation and rates have mirrored those of his colleagues.
Last year, job growth, consumer spending and inflation all showed signs of slowing, suggesting that the Fed’s aggressive rate hikes were paying off.
In December, Fed officials forecast the fed funds rate to rise in a range of 5% to 5.25% and then the Fed to pause, a development that volatile stock markets and economists would welcome. That would mean two more quarter-point rate hikes since the funds rate is currently 4.5% to 4.75%
But in January, employers added blockbuster 517,000 jobs. Consumer spending and an underlying measure of retail sales both rose about 1.8%; And inflation has accelerated more than planned.
The annual gain in the consumer price index slowed for the seventh consecutive month, dropping from 6.5% to 6.4%. But the index rose 0.5% on a monthly basis after posting a gain of only 0.1% in December.
Fed officials fear a robust labor market will continue to strengthen wages and spending, in turn driving annual increases in consumer prices that hit a 40-year high of 9.1% last June.
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Markets now expect the fed funds rate to climb to a range of 5.25% to 5.5%, half a point higher than what was estimated just a few weeks ago. Waller suggested the forecast could be correct if the economy keeps rolling.
At the same time, Waller acknowledged that January’s strong reports may have been a byproduct of unusually mild weather that boosted consumer spending and economic activity.
“If job creation falls back to a level consistent with the downward trajectory seen at the end of last year, and CPI inflation pulls back significantly from January’s numbers and resumes its downward trajectory, then I’d approve of a (funds rate) hike a few more times,” in line with the Fed’s December forecast.
Further reports on job growth in February and inflation over the next two weeks could be key in determining the Fed’s course in the months ahead.