Yesterday Richmond Federal Reserve President Thomas Barkin told The Financial Times that interest rates must stay high until inflation improves. 4% interest rates wouldn’t surprise him, he said.
And today Federal Reserve Vice Chair Lael Brainard said at the Clearing House and Bank Policy Institute Annual Conference in New York, “It may take some time” for the full effect of tighter financial conditions to work their way through the economy. And she added, “So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further. It will be necessary to see several months of low monthly inflation readings to be confident that inflation is moving back down to 2%.”
Besides that 4% level, here’s another number to watch. In order to restore price stability, the U.S. central bank will need to tighten its monetary policy further so that real interest rates, which are adjusted for inflation, sit above zero, Barkin said in his interview. With inflation running at an 8.5% annual pace in July, Barkin’s formula says interest rates still have a long way to run.
The Fed’s benchmark interest rate now sits at 2.25% to 2.50%. The CME FedWatch Tool puts the odds of a 75 basis point increase to 3% to 3.25% at the Fed’s September 21 meeting at 74% today, September 7.
