Three Fed presidents make the case for more rate increases

St. Louis Federal Reserve President Alberto Musalem said additional interest rate increases are likely needed to quell inflation¹. Bloomberg reported his remarks in similar terms, saying further increases may be needed for the central bank to achieve its goal². Musalem added that it would be better for the Fed to act sooner than to wait¹.

Chicago Fed President Austan Goolsbee said strong demand may be adding to US inflation, and that there is no ambiguity about how the Fed would react if it is³. He also warned that the central bank cannot ignore repeated and persistent supply shocks⁴, and that the road back to 2 percent inflation may not be painless⁴. In remarks reported by the Associated Press, he said the Fed may have to cause economic pain in the form of higher unemployment in order to combat inflation⁶.

Minneapolis Fed President Neel Kashkari said inflation remains too high in all aspects of the economy, despite the rate increases the central bank has already delivered⁵.

Why it matters to investors

The three officials were speaking after tightening had already begun, not before it⁵. That changes the question in front of markets. It is no longer whether the Fed moves, but how far and how fast, and Musalem’s stated preference for acting sooner rather than waiting points to a quicker path as well as a higher one¹.

Bank of America has warned that the Fed could push rates above 5 percent⁷. Its strategists expect 10-year Treasury yields to hold near 5 percent through the end of the year, and Kashkari’s comments reinforced that hawkish reading⁷.

What to watch

Goolsbee’s supply shock argument is the one to follow, because it decides whether the Fed looks through energy driven price rises or leans against them⁴. On the evidence of his own remarks, he is leaning against them⁴.

The second marker is the labour market. Once officials discuss higher unemployment openly as a cost of disinflation, employment data stops being read purely as a growth signal and starts being read as a policy signal⁶. The third is the distance between the path the Fed describes and the one the bond market prices, which Bank of America puts near 5 percent at the 10-year point⁷. Kashkari’s claim that price pressure is present in all aspects of the economy is the specific assertion that incoming data will confirm or undercut⁵.