Fed policymakers support hikes above 5% despite dropping inflation levels

Policymakers at the US Federal Reserve are advocating for more hikes in interest rates. Several policymakers are supporting a hike of at least 5% despite inflation showing signs of easing and slowing economic activity.

Policymakers propose interest rate hike above 5%

A report by Reuters noted that the Cleveland Fed President, Loretta Mester, wanted the Fed to keep hiking interest rates. Mester’s remarks mirror those shared by the other policymakers, most of whom supported the idea of the policy rate climbing to between 5% and 5.25% in the coming months.

Mester has also said that she anticipates the Fed policy rate to increase more than expected and remain at the peak levels to drop inflation further down. The benchmark overnight lending rate for the Federal Reserve is at a target range of 4.25% to 4.50%, with investors expecting that the Fed will increase the rate by 0.25% during the January 31 to February 1 meeting.

The Fed has aggressively hiked interest rates amid significantly high inflation levels over the past year. However, the slowing down in inflation, manufacturing, and spending has increased expectations that the Fed will end the interest rate hikes sooner than most policymakers expect. The policy rate is still close to the 5% level.

Interest rate hikes commenced in March last year. At the time, the policy rate was between 0% and 0.25%, while inflation also increased to 40-year highs.

Effects of interest rate hikes

While several Fed officials are supporting slowing interest rate hikes after the aggressive hike witnessed in 2022, the upcoming Fed meeting is expected to result in a 50 basis point hike.

The Fed compiled survey data from central bank districts across the US. The data showed that while prices were still rising, the pace seen in most districts had slowed down. On the other hand, employment was still increasing at a “modest to moderate” rate in most parts of the country, with several Fed districts reporting modest economic growth.

The New York Fed noted that economic activity had contracted, while four districts also reported slowing growth or slight declines. The majority of districts expected little growth.

Despite these effects, the Fed policymakers noted that the mistake they wanted to avoid was to stop short of taming inflation, only for the institution to be forced to raise rates further in the future. This would avoid a similar situation to the one seen in the 1980s and the 1980s.

The Philadelphia Fed President, Patrick Harker, who has a less hawkish stance, opined that the Fed needed to focus on quarter percentage point increases in the future, with several rises being implemented before the entire process was halted.