Fed’s rate hikes to slow down next month, Mary Daly says

Mary Daly, a member of the Federal Reserve's policy committee, said Wednesday that the central bank might slow down its rate hikes next month. The San Francisco Fed President said Monday that it was still too early to declare victory over inflation, and the central bank might raise its key interest rate by 0.25 points later this month.

It would be the Federal reserve's first reduction in its rate hikes since December — when it implemented a half-point increase. Since it had underestimated the threat of inflation last year, the central bank is forced to deliver a series of historic rate hikes to contain the rising prices.

Daly was asked if she supported the idea of increasing the rates by a quarter-point or a half-point. She explained that the Fed depends on data to decide any changes in its monetary policy. Daly also said that the fed funds rate should be above five percent to bring inflation down.

Other regional presidents, such as Raphael Bostic of the Atlanta Fed and James Bullard of the St. Louis Fed, have also said that the Fed has a long way to go before it can fully address the demand side of the economy. They explained that inflation data play a crucial role in determining the central bank's next move.

Support for smaller rate rise

Last week, Thomas Barkin, the president of the Richmond Federal Reserve, suggested that the central bank should consider reducing the pace of its rate hikes to bring inflation down.

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In December, officials projected that the Fed funds rate would reach 5.25 percent. However, it currently remains at 4.25 percent to 4.50 percent. According to the minutes from the Fed's last meeting of 2022, officials would not reduce the rate until 2024.

Federal funds futures markets are currently pricing in a quarter-point rate increase in February and a stop-and-go approach on the policy rate. They also see the Fed reducing the rate by the end of the year.

The speculation about the possible reduction in the Fed's rate hikes has been growing as the economic data show a significant improvement. Daly suggested closely monitoring services inflation, which is the best proxy for the underlying price pressures. These costs are tied to the labor market, and they have not shown signs of slowing down.

Citigroup CEO sees 5.5 interest rate by May

Citigroup CEO Jane Fraser said the Fed would likely increase its loan interest rate to around 5.5 percent by May. She also anticipated an economic recession in the second half of 2023.

In an interview with Nikkei, Fraser said that despite the decline in overall inflation, services inflation was still persistent. The CEO said she expected the Fed to increase its target rate by next May and maintain the status quo throughout the year.

The rapid pace of the U.S. rate hikes since last year has affected global financial markets. For instance, during January-September, Citigroup's net income declined by 34 percent.

"No part of the industry has felt the impact of the macro environment more than investment banking," Fraser said. "A stalled deal environment made 2022 a difficult year across the board."

In response, the Bank of Japan expanded its target range for the interest rates it charges on long-term loans. This move is expected to make the country's monetary policy more sustainable. Fraser noted that the BOJ's objective is to prevent side effects from happening to the economy.