Policymakers back rate hikes as Biden trusts Fed

May 10 (Reuters) – Federal Reserve officials on Tuesday strengthened their case for the fastest round of interest rate hikes since at least the 1990s to fight inflation, while Chairman Joe Biden urged the U.S. central bank to rein in price hikes he said were hurting the United States. households.

“I know families all over America are hurting because of inflation,” Biden said in a White House speech a day before new data showed consumer prices continue to rise at a faster pace. by more than 8%. “I want every American to know that I take inflation very seriously and it is my national priority.” Read more

Fed officials, now engaged in a series of half-percentage-point rate hikes, said their aggressive efforts to rein in consumer and business demand for goods and services through higher costs higher borrowing was needed to slow the fastest inflation in 40 years.

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But they also recognized that it would be a painful race.

Recent volatility in asset markets is “painful”, Cleveland Fed Chair Loretta Mester told Reuters, but also a necessary part of the tightening of credit conditions in the economy, a process that involves a reassessment of all assets, from corporate stocks to single-family homes. .

Unemployment could rise, she said. The Fed may even face losses on some of its own holdings if it chooses to sell them in such an unpredictable environment in order to shrink its balance sheet more quickly, a step that could help drive interest rates higher than ever. otherwise, Mester added.

“It’s going to be a bumpy ride,” she said, as the implications of the Fed’s policy shift became clearer across the economy, both due to falling stock prices and of rising interest rates.

It’s a dose of strong medicine that even Biden seemed willing to accept, choosing the risk of a possible slowing economy or rising unemployment over inflation so high right now that it’s eroding. standard of living for most Americans — and giving fodder to his Republican opponents in the election later this year.

“The Fed should do its job and it will do it, I am convinced of that,” Biden said.

GLOBAL RECESSION FEARS

Although the Fed last week raised its benchmark overnight lending rate by half a percentage point to a target range of between 0.75% and 1%, economists question whether it took so much behind in its monetary tightening that it must now act so quickly and raise borrowing costs to a point where they could cause a recession. Read more

“We are living in the most chaotic and difficult to predict macroeconomic period in decades. The ingredients for a global recession are on the table,” wrote Seth Carpenter, chief global economist at Morgan Stanley, on Sunday. Although the United States may avoid a recession, “markets will have to deal with the growing likelihood of a recession.”

Wednesday’s new data will provide an updated view of consumer prices that may show some softening, but not yet enough to distract Fed policymakers from their higher rate trajectory.

This includes rate hikes of 50 basis points in June and July, and then further hikes throughout the year at a pace and level yet to be determined.

New York Fed Chairman John Williams, speaking earlier on Tuesday, agreed that the price of reducing inflation could be a slight increase in the US unemployment rate, currently at 3.6% and indicative of a labor market which, in many respects, is the strongest in 50 years.

“When I think of a ‘soft landing’ it’s really a matter of, yes, we could see below trend growth for a while and we could definitely see unemployment go up somewhat but not hugely. “Williams said at an economics conference. organized by the German Central Bank in Eltville am Rhein, Germany. “I think that’s the challenge.”

Speaking to a local Northeast Maryland Chamber of Commerce, Richmond Fed President Thomas Barkin said that after the next rate hikes, the central bank would be able to determine whether inflation remained at a level requiring the economy to be curbed. or not.

“We will do what we have to do,” Barkin said.

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Additional reporting by Francesco Canepa, Lindsay Dunsmuir and Jeff Mason; Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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