Fed officials beat inflation drum; 50-basis-point rate hike 'reasonable' next month

By Lindsay Dunsmuir and Dan Burns

(Reuters) -Federal Reserve officials voiced their determination again on Wednesday to rein in high inflation, although one noted a half-percentage-point hike in the U.S. central bank's key interest rate next month might be enough to march toward that goal.

"I start from the idea that 50 (basis points) would be a reasonable thing to do in September because I believe I'm seeing evidence in my contact conversations, and in the observations of the world I see, that there are some bright spots for me," San Francisco Fed President Mary Daly said in an interview with Reuters.

However, "if we just see inflation roaring ahead undauntedly, the labor market showing no signs of slowing, then we'll be in a different position where a 75-basis-point increase might be more appropriate. But I go in with the 50 in mind as I look at the data coming in," Daly added.

Whether the Fed will go ahead with a third straight 75-basis-point rate hike at its Sept. 20-21 policy meeting - a pace unmatched in more than a generation - or dial back a bit is of central interest to investors, businesses and consumers who are increasingly fearful that the central bank's inflation fight may trigger a recession.

After Daly's remarks, investors in futures contracts tied to the Fed's benchmark overnight interest rate pared back the probability that the central bank would raise the policy rate by 75 basis points next month.

Fed Chair Jerome Powell said last week the central bank may consider another "unusually large" rate hike at the September meeting, with officials guided in their decision making by more than a dozen critical data points covering inflation, employment, consumer spending and economic growth between now and then.

Several policymakers, including Daly, have shown stiffening resolve this week to continue the aggressive monetary tightening, with nearly all of them uniformly flagging that the central bank remains determined to press ahead with rate hikes until it sees strong and long-lasting evidence that inflation is on track back down to the Fed's 2% goal.

Inflation has for months confounded expectations that it would ease and is now, by the Fed's preferred measure, running at more than three times the target.

'A VERY UNLIKELY SCENARIO'

In a separate appearance, Minneapolis Fed President Neel Kashkari echoed comments by Daly this week that it is extremely unlikely that the central bank will pivot to cutting interest rates in 2023.

"Some financial markets are indicating they expect us to cut interest rates next year," Kashkari said at an event held as part of a financial regulation conference in New York.

"I don't want to say it's impossible, but it seems like that's a very unlikely scenario right now given what I know about the underlying inflation dynamics. The more likely scenario is we would continue raising (interest rates) and then we would sit there until we have a lot of confidence that inflation is well on its way back down to 2%," Kashkari added.

St. Louis Fed President James Bullard also said the central bank will be steadfast in raising rates to bring inflation back down.

"We are going to be tough and get that to happen," Bullard said in an interview with CNBC. "I think we can take robust action and get back to 2%."

That will probably involve having to keep rates "higher for longer" in order to gather enough evidence that inflation is coming down in a sustainable way, Bullard said, noting that policymakers will have to see evidence that headline and core measures of inflation are "coming down convincingly" before any let-up.

Bullard has previously said he wants the Fed's policy rate to rise to between 3.75% and 4.00% this year to help quash inflation.

Speaking in Virginia, Richmond Fed President Thomas Barkin said the central bank has made clear it will "do what it takes" as he warned that inflation will recede but "not immediately, not suddenly and not predictably."

For her part, Daly told Reuters that raising the policy rate to 3.4% by the end of this year "is a reasonable place to think about us getting to" and rebuffed the assertion that the Fed's rate hikes from here - which would take it beyond policymakers' collective judgment of the long-run "neutral rate" of interest - ought to be considered "restrictive."

"Not in my judgment," Daly said, arguing that the interest rate level at which the Fed is actively impeding growth and activity is closer to 3%.

"When you think of 2.5%, that's the longer-run neutral rate of interest, but right now, inflation is high," Daly added. "And there's a lot of demand chasing limited supply, and so of course the neutral rate is elevated. So my own estimate of where that would be right now is around or a little bit over 3%, maybe 3.1%."

"So in my judgment, we're not even up to neutral right now," Daly said.

(Reporting by Lindsay Dunsmuir and Dan Burns; Editing by Paul Simao and Will Dunham)

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