By Ann Saphir and Michael S. Derby
Oct 30 (Reuters) - A trio of Federal Reserve officials made the case on Friday for more interest rate increases to combat high levels of inflation, in the first round of commentary made by central bankers after this week’s monetary policy meeting that saw short-term borrowing costs left steady.
Calling the current level of price pressures and the time inflation has been above the 2% “unacceptable,” Federal Reserve Bank of Dallas President Lorie Logan said the central
bank has more work to do.
“It remains clear to me, given the current outlook, that the (Federal Open Market Committee) needs to implement at least two more 25-basis-point rate increases,” Logan said in the text of a speech prepared for an event at Davidson College.
After delivering those increases, “it would make sense in my view to pause and examine economic and financial developments to determine what further action may be appropriate,” Logan said.
Logan holds a voting role on the FOMC this year and joined with her colleagues in favor of the FOMC’s decision to hold its interest rate target range steady at between 3.75% and 4%. Logan explained that not moving the target at the meeting held over Tuesday and Wednesday came amid volatile markets and gave the public time to adjust to the shift toward higher borrowing costs.
Speaking separately, Federal Reserve Bank of St. Louis President Alberto Musalem, who does not hold a vote on the FOMC this year, also argued for higher rates.
"Additional firming of monetary policy will be necessary, and soon," Musalem said in the text of a speech to be presented at an event held by the Shadow Open Market Committee, a group that takes stock of Fed actions and policies.
"Incremental adjustments made earlier are usually less disruptive than larger and abrupt actions taken later," he said.
Musalem said that inflation remains too high relative to the 2% target and added that it was unlikely to ease absent Fed action. He noted that monetary policy is not in a position to lower inflation at the current moment.
"I believe that monetary policy and financial conditions remain accommodative. Financial conditions tightened recently," Musalem said.
Meanwhile, Richmond Fed leader Thomas Barkin said in an interview on SiriusXM's Business Briefing that “inflation's high, demand is solid, unemployment is relatively low. So I think the direction of travel is pretty straightforward” for future interest rate increases.
“The question, though, is pace ... We signaled a gradual approach. Gradual makes sense when you're not much behind the curve, where you want time to learn,” Barkin said.
MORE WORK TO DO
The officials spoke on Friday as the central bank’s so-called blackout period that limits communications around FOMC meetings ended.
Two Fed officials dissented at the gathering but in a break from what has become a common process, neither Cleveland Fed leader Beth Hammack nor Fed Governor Lisa Cook offered formal explanation Friday for why they voted in favor of a rate hike.
The Fed raised rates in September to help bring persistently high inflation pressures back to the 2% target and officials have broadly signaled they are not done, with traders and investors eyeing the December meeting as the next time to act.
After the FOMC meeting, Chairman Kevin Warsh was asked at a press conference why the Fed didn’t hike rates at this week’s gathering if it thinks inflation is too high.
“I'm encouraged by the progress we've made in a short period of time” on lowering inflation, Warsh said, “but if the crux of your question is, you haven't delivered yet, you haven't achieved price stability, you're right about that. But we're working on it.”
The Fed leader, who has been loath to provide guidance about the interest rate outlook, did not say what he thought the Fed would do at the Dec. 8-9 policy meeting.
Futures markets have been easing back on expectations of a December rate hike though market participants still believe an increase in short-term borrowing costs is more likely than holding steady.
Stock indexes were suffering large declines on Friday, with the Nasdaq falling to its weakest level in three months, as artificial intelligence developments rattled investors.
Adding to the uncertainty of the outlook is next Tuesday’s midterm elections in the US, which could see major advances by Democratic candidates, driven by voters who’ve shown deep discontent over inflation and the impact of President Donald Trump’s Middle East war.
The market’s worry that AI-related activity might slow could take some pressure off the Fed if realized. That's because central bankers have for some time noted that very hot levels of technology investment have helped drive up inflation. Slower activity in that sector might help ease price pressures and reduce the need for the Fed to raise rates.
(Reporting by Michael S. Derby, Ann Saphir and Howard Schneider; Editing by Paul Simao and Chizu Nomiyama )
