Getting inflation under control will require interest rates to rise at a faster pace than usual, although the pace of price increases is likely to have peaked, Federal Reserve board member Christopher Waller said on Wednesday.
That means the central bank is likely to raise short-term interest rates by half a percentage point or 50 basis points at its May meeting and possibly follow it up with similar moves in the coming months, Waller told CNBC. Fed usually rises in increments of 25 basis points. A base point corresponds to 0.01%.
“I think the data has come in precisely to support this step of political action if the committee chooses to do so and gives us the basis to do so,” he said during a live “Closing Bell” interview with CNBC’s Sara Eisen. “I prefer a front-loading approach, so an increase of 50 basis points in May would be in line with that, and possibly more in June and July.”
Markets have already almost fully priced this level of growth at next month’s meeting of the Federal Open Market Committee, as well as the following session in June, according to CME Group data, which tracks movements in the Fed Funds futures market. Pricing for July is also sloping in this way, with a 56.5% probability of another 50 basis point increase.
This means that if the Fed chooses to move aggressively, it will not come as a surprise.
Waller said he believes the central bank can pull the tighter policy now because the economy is strong enough to support higher interest rates. The Fed is seeking to raise interest rates to stave off inflation at its highest level in more than 40 years.
“I think we are going to deal with inflation. We have laid out our plans,” he said. “We’re in a position where the economy is strong, so it’s a good time to take aggressive action because the economy can handle it.”
Nevertheless, there is some disagreement about how aggressive FOMC members want to be in the inflation battle.
In March, those in favor of a quarter percentage point increase had only a small majority over those who wanted to double it. Officials, through their public statements, have given differing views on how far the Fed should go, with Waller part of a group that wants interest rates to go past “neutral,” or the point where they are neither considered restrictive nor stimulating. The neutral fund rate is now considered to be around 2.5%.
On the other side of the debate, policy makers including Fed Board member Lael Brainard and Chicago’s Fed President Charles Evans have in recent days said they would rather set the course neutral and then assess what future actions may be needed.
“I think we want to get over neutral for sure in the last half of the year and we need to get closer to neutral as soon as possible,” Waller said.
St. Louis Fed President James Bullard told the Financial Times that it is “fantasy” to believe that interest rates can go neutral and still bring inflation down.
For his part, Waller said he is confident that inflation will start to fall, even though the Fed’s powers are limited to controlling the limping supply chains associated with the current round of higher prices.
“All we can do is push down the demand for these products and take some pressure off the prices that people have to pay for these products,” Waller said. “We can not produce more wheat, we can not produce more semiconductors, but we can influence the demand for these products in a way that puts downward pressure and removes some pressure from inflation.”
Earlier in the day, Finance Minister Janet Yellen, a former Fed chairman, said of the agency’s board members: “It’s their job to bring inflation down.”
“They have a dual mandate. They will try to maintain strong labor markets while bringing down inflation,” Yellen said during an appearance before the Atlantic Council. “And it’s been done before. It’s not an impossible combination, but it will require skill and also good luck.”