Fed Makes Surprising Comments Hinting Another Interest Increase By Investing.com

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Investing.com – The central bank should be prepared to continue raising because inflation remains very high and the labor market very tight, an official said on Friday, pointing to rifts within the Fed’s rate-setting committee.

Fed Governor Michelle Bowman told a banking conference in Germany that she was not confident the central bank was making enough progress in slowing economic activity and inflation.

The Fed raised its benchmark interest rate on May 3 by a quarter of a percentage point to a range of 5% to 5.25%, a 16-year high, and Fed Chair Jerome Powell suggested that officials may pause the rate hike at the central bank meeting. From the 13th to the 14th of June.

At the Fed’s March meeting, most officials expected to keep interest rates steady after the latest hike, in part because they expect stress on the banking system after the failures of three medium-sized lenders this year to further tighten financial conditions.

But a significant minority of Fed officials predicted that interest rates would need to rise by another quarter point from current levels if the economy were to perform in line with their expectations.

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Additional tightening of monetary policy

Ms. Bowman’s remarks indicated that she was part of that group that preferred higher rates. “If inflation remains high and the labor market remains tight, then it is best to have additional monetary tightening to achieve a sufficiently restrictive monetary policy stance to bring down inflation,” she said in her remarks in Germany.

Ms. Bowman said she would look for “consistent evidence that inflation is on a downward trajectory” to determine whether interest rates were sufficiently constraining. She added that the latest readings on inflation and employment released during the past week “did not provide consistent evidence that inflation is on a downward path.”

Ms. Bowman said she expects banks to continue to tighten lending standards as they face higher funding costs and fewer sources of funding after recent bank failures. She said recent declines in share prices of other regional banks add to this uncertainty.

“I will continue to watch the incoming data closely as I consider the appropriate stance for monetary policy at our meeting in June,” Ms. Bowman said.

Conflicting statements of federal members

Investors in the interest rate futures markets in recent days have seen a relatively low probability – around 10% on Thursday – of a rate hike next month, according to CME Group.

In recent public statements, some Fed officials indicated greater concern about banking system stress, which could lead them to defend a rate hike next month. Others said they were still more troubled by persistently high inflation readings, but did not offer strong support for another increase or pause.

The Labor Department reported on Wednesday that inflation fell to 4.9% in April from a year earlier, down from March’s 5% increase. The unemployment rate fell to 3.4% in April, equaling the lowest level since 1969 and indicating that the labor market remained tight.

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