Fed Gov Christopher Waller warns of more rate hikes

Federal Reserve Governor Christopher Waller has said there could be more rate hikes than markets anticipate because the central bank has not reached its inflation target.

Fed chairman Jerome Powell had made a public statement a day before Waller delivered his remarks during an agribusiness conference at Arkansas State University on Wednesday. Analysts noted that Powell's comments were less hawkish, with the chairman acknowledging disinflationary signs in the economy.

"We are seeing that effort begin to pay off, but we have farther to go," Waller said. "And, it might be a long fight, with interest rates higher for longer than some are currently expecting. But I will not hesitate to do what is needed to get my job done."

Waller discussed the higher-than-expected nonfarm payroll growth in January, which indicated a tight job market. He explained that the additional jobs could fuel consumer spending and maintain inflation at a high rate.

Waller explained that inflation remains too high at the moment while the projected economic growth remains moderate. However, he acknowledged that wage data had started to move "in the right direction," albeit not to the point that convinced the central bank to loosen its monetary policy.

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He predicted that inflation would not come down quickly based on economic data, indicating that the Fed would not achieve its target inflation rate of two percent this year.

"But I’m not seeing signals of this quick decline in the economic data, and I am prepared for a longer fight to get inflation down to our target.”

Christopher Waller, Governor of Federal Reserve

Other Fed officials also shared a similar opinion with Waller. Fed Governor Lisa Cook spoke about the central bank's policy on a separate occasion on Wednesday, stressing the need to keep interest rates "sufficiently restrictive." Cook, however, said the process must be done gradually to give the Fed time to evaluate its policy effect on the economy.

New York Fed President John Williams agreed that interest rates should remain at a restrictive level. He also pointed out that price pressures persisted in the services sector, indicating a demand-supply imbalance in said sector. Williams argued that Fed officials should focus on managing inflation in that specific sector.

Analysts currently expect the central bank to have two more rate hikes — a 25-basis-points increase each at rate-setting meetings in March and May. They also predict that the Fed will start cutting the rates by a quarter-point by the end of 2023 as the economy begins slowing down.

Last week, the Fed raised the interest rate by 25 basis points to a target range of 4.5 to 4.75 percent. Experts have predicted that the target range will be over five percent by the end of this monetary tightening cycle.

Recession concerns

Markets are more optimistic about the U.S.'s ability to dodge a recession due to recent strong economic data, like the job report published last week, despite previous concerns from economists.

President Joe Biden also recently said he was confident that the U.S. would not enter a recession in 2023 and 2024. His remarks were more optimistic compared to last year when he said there was a chance for a recession to occur in the U.S.

On the other hand, some analysts, such as PIMCO North American economist Tiffany Wilding, argue that a recession remains likely.

"Although market-based measures of financial conditions have eased somewhat recently, financial conditions are still tight by historical standards," said Wilding. "We think it's underappreciated how much tightening pressure the overnight rate actually puts on the economy."

Markets rallied in recent weeks following signs of cooling inflation but tumbled after the publication of upbeat payroll data last week as investors were concerned that it would cause further monetary tightening by the Fed.