US: Fed united on need for higher rates, divided over how high

The Federal Reserve needs to keep raising borrowing costs to bring high inflation under control, a string of US central bank officials said on Thursday, even as they debated how fast, and how high, to lift them.

St. Louis Fed President James Bullard, who was among the central bank's earliest advocates (last year) of a more muscular response to fast-building price pressures, said that given the strength of the economy, he is currently leaning toward supporting a third straight 75-basis-point interest rate hike in September.

"I don't really see why you want to drag out interest rate increases into next year," Bullard told the Wall Street Journal, saying he would like to get the Fed's benchmark overnight interest rate to a target range of 3.75 per cent to 4.00 per cent by the end of this year. The Fed's policy rate is currently 2.25 - 2.50 per cent.

Earlier on Thursday, San Francisco Fed President Mary Daly said hiking rates by 50 or 75 basis points at the Fed's next policy meeting on September 20-21 would be a "reasonable" way to get short-term borrowing costs to "a little bit above" 3 per cent by the end of this year, and on their way to a little bit higher in 2023.

The exact pace would depend on employment data, which has shown brisk growth in recent months, and inflation, Daly told CNN International. Inflation, by the Fed's preferred measure, is running at more than three times the central bank's 2 per cent target.

With the global economic slowdown acting as a headwind on US growth, that "we have to take that into consideration as we ensure that we don't overdo policy", she said.

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Fresh data on Thursday showing a dip in the number of Americans filing for unemployment benefits last week added to evidence that — save for the fast-cooling housing market — the economy was holding up, despite the steepest round of Fed rate hikes since the 1980s.

'Definitely premature'

Investors may get a better read on the Fed's likely actions in the coming months next Friday, August 26, when Fed Chair Jerome Powell gives a highly anticipated speech on the economic outlook at the annual global central bankers' conference in Jackson Hole, Wyoming.

Last month, Powell held the door open to another "unusually large" rate hike at the Fed's next meeting, but also said "it likely will become appropriate to slow the pace of increases" to give policymakers time to take stock of how higher borrowing costs are affecting the economy.

Fed officials' remarks on Thursday suggest an emerging split in the central bank between those who want to push rates higher quickly, and those who are more cautious because of potential damage to the job market and the risk of a rise in the U.S. unemployment rate, which is now at 3.5 per cent.