A handful of Fed officials Wednesday pointed to continued strength in the job market as evidence inflation pressures remain persistent, likely requiring the Fed to continue raising interest rates and keep them elevated for a longer period.
“There’s not much evidence in my view that the rate hikes we’ve done so far are having much of an effect on the job market,” Minneapolis Fed President Neel Kashkari said in a town hall at the Boston Economic Club. “So that means we need to do more. How much more, I’m not sure.”
Kashkari, along with Fed Governor Christopher Waller and New York Fed President John Williams, noted Wednesday that wage growth is still “well above” levels consistent with the Fed’s 2% inflation target, pointing to continued inflation in the services sector, excluding housing.
Kashkari said wage growth closer to 3% would be more consistent with 2% inflation.
The comments come after a much stronger-than-expected report Friday showed 517,000 jobs were created in December. Annual wage growth came in at 4.4%, a slowdown from the 5.1% wage growth recorded in November.
Waller said recent data was moving in the right direction but said he's watching for further slowing.
“We don’t want excessive wage increases to be a potential source of higher inflation in the future,” he said.
While some, including Fed Chair Jerome Powell, have suggested they think inflation will fall significantly this year, Waller said he’s not seeing signs of that.
“That would be a welcome outcome,” Waller said at the Arkansas State University Agribusiness Conference. “But I’m not seeing signals of this quick decline in the economic data, and I am prepared for a longer fight to get inflation down to our target.”
The key — said the New York Fed’s Williams — is to raise rates to levels that will restrict growth and keep them there for a few years to continue its restraint.
“To me, the important thing is we need a sufficiently restrictive stance and we need to attain a sufficiently restrictive stance of policy,” Williams said at a Wall Street Journal event. “We’re going to need to maintain that for a few years to make sure we get inflation to 2%, and then eventually over time we’ll get interest rates presumably back to more normal levels.”
He noted that rates right now are barely into restrictive territory.
Williams said forecasts officials penciled in for raising the federal funds rate this year to between 5% and 5.25% are still a good guide for where interest rates are headed this year. After the Fed's latest hike last week, the Fed brought its benchmark rate to a target of 4.50% to 4.75%. That's the highest level since 2007.
Williams noted that future rate hikes of a quarter percentage point “seems like the right size.” But he said the pace of further hikes would depend on incoming data.
"If financial conditions loosen too much, we would have to go higher on rates," he said.
When it comes to cutting rates, as the market has tried to front run the Fed on pricing in, Williams said they would be needed only to respond to weaker inflation or lower levels of inflation in the future.