By Ann Saphir
Jul 14 (Reuters) – Two of the Federal Reserve’s monetary policy makers spoke on Thursday in favor of a further 75 basis point interest rate hike at this month’s U.S. central bank meeting, and not for a major.
Traders had been quick to bet on an even higher rate hike after a report on Wednesday showed inflation was accelerating.
The remarks from Governor Christopher Waller and St Louis Fed President James Bullard quickly turned the tide for markets, even though they still assign a 45% chance of a 1 percentage point rate hike.
Waller told the Rocky Mountain Economic Summit that he would lean toward a higher hike if retail or home sales data show demand isn’t slowing fast enough to bring down inflation, or if there is a deterioration in prices. inflation expectations.
However, he added, “markets may have gotten a little bit ahead yesterday (Wednesday).”
Despite the “major disappointment” over this week’s report, which showed year-on-year inflation rising 9.1% in June, Waller expected an “ugly” figure and only strengthened his own view that a rise in interest rates 75 basis points at the July 26-27 Fed meeting would be appropriate.
“Don’t overdo rate hikes,” he said, noting that a three-quarter percentage point increase is still “huge” and shows that the Fed is serious about bringing inflation back to its target for two%.
“Don’t say that because we don’t get to 100, we’re not doing the job,” he added.
Bullard, in an interview with the Japanese financial daily Nikkei published on Thursday, also said he does not support a higher hike for now.
“Until now, we’ve mostly framed this as 50 versus 75 at this meeting,” Bullard said. “I think 75 has a lot of virtues, because the long-term neutral (rate) that the committee has, according to the Summary of Economic Projections, is actually around 2.5%.”
Asked if the Fed’s policy rate, currently in a range of 1.5%-1.75%, could exceed 4% by the end of the year, Bullard said: “I guess it’s possible”, but cautioned that that would require inflation data to keep coming in “adversely.”
Waller also said that based on the data, further rate hikes would need to restrain demand until core inflation, which excludes volatile food and energy prices, starts to decline.
Given that the labor market is very strong and the data shows no signs of weakening, he said a “soft landing” for the economy is “very plausible” and a recession, currently inconceivable with the unemployment rate at 3, can be avoided. 6%.
(Reporting by Ann Saphir and Dan Burns; Editing in Spanish by Javier López de Lérida)