Some Fed officials are calling for higher rates as inflation bites

In a surprising twist, some Fed members are calling for rate hikes to combat inflation—an admission that would’ve seemed ludicrous just a few months ago.

According to the minutes of the Fed’s last meeting, “Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.”

The minutes also stated that “recent monthly data showed significant increases in components of both goods and services price inflation.”

At its last meeting, the Fed voted to leave interest rates unchanged, with Chairman Jerome Powell admitting that progress on inflation had taken “longer than previously expected.”

Although Powell reassured the markets that rate hikes weren’t on the table, some members of his FOMC board obviously don’t see it the same way.

As recently as March, Fed officials had forecast as many as four rate cuts in 2024, but the latest batch of higher-than-expected inflation data has thrown a wrench in their plans.

In the meantime, economists say the central bank has no other option but to preach patience.

“Higher for longer”

For investors, businesses, and ordinary Americans, patience just means that interest rates will remain higher for longer.

“Higher for longer is the official mantra as the Fed officially acknowledged that inflation is staying more sticky than they would have liked,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

“Although they wanted to cut rates, they are not going to be able to do that in the near future,” he explained.

Goldman Sachs CEO David Solomon believes that keeping rates higher for longer means there will likely be “zero” rate cuts this year.

This message isn’t what Americans want to hear, but economists think it must be implemented if the Fed wants to bring inflation back down to its 2% target.

According to economist Stephanie Roth, there’s already evidence that persistently higher rates are having their desired effect, albeit slowly.

In her view, the latest batch of inflation and jobs data “validates” the Fed’s current strategy.

Roth was referring to the April Consumer Price Index (CPI), which showed that headline inflation may have peaked. The same report revealed that the core CPI posted its smallest annual rise since April 2021.

Meanwhile, the monthly jobs report showed a slower hiring pace of 175,000 in April as unemployment ticked up to 3.9% from 3.8%.