Fed may need more hikes if inflation and labor stay hot

The Federal Reserve will likely need to raise interest rates further and hold them higher for some time if U.S. price pressures don't cool off and the jobs market shows no sign of slowing, Governor Michelle Bowman said. 

"Should inflation remain high and the labor market remain tight, additional monetary policy tightening will likely be appropriate to attain a sufficiently restrictive stance of monetary policy," Bowman said in remarks to a symposium at the European Central Bank in Frankfurt. "I also expect that our policy rate will need to remain sufficiently restrictive for some time to bring inflation down and create conditions that will support a sustainably strong labor market." 

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Policymakers raised rates by a quarter percentage point at a meeting earlier this month, bringing their benchmark to a target range of 5% to 5.25% and signaling they may be ready to pause their tightening cycle.  

With the economic outlook being uncertain and policy actions not on a preset course, Bowman said she would consider data due before the Fed's June 13-14 rate-setting meeting to determine her view on the policy stance. 

The official said she's seeking signs of "consistent evidence that inflation is on a downward path when considering future rate increases and at what point we will have achieved a sufficiently restrictive stance for the policy rate." 

Prices climbed 4.9% from a year earlier in April, consumer price index data released Wednesday showed, the first sub-5% reading in two years. Excluding food and energy, the so-called core inflation rate also moderated. While the Fed targets a different yardstick of annual price movements - the personal consumption expenditures gauge — all measures are running at more than double its 2% target pace.

A separate report last week showed U.S. hiring and workers' pay gains accelerated last month, with the unemployment rate falling back to a multi-decade low of 3.4%.  

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'Too high'

"Inflation remains much too high, and measures of core inflation have remained persistently elevated, with declining unemployment and ongoing wage growth," Bowman said. The most recent CPI and employment reports "have not provided consistent evidence that inflation is on a downward path." 

Fed officials have delivered five percentage points of interest-rate increases in little over a year, their most aggressive tightening campaign since the 1980s.

"Our policy stance is now restrictive, but whether it is sufficiently restrictive to bring inflation down remains uncertain," said Bowman. 

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Another review

On April 28, the Fed unveiled a 102-page assessment of its oversight of Silicon Valley Bank, with its bank-supervision chief calling for an extensive reevaluation of requirements for U.S. financial firms as regulators said the failure of the lender exposed lapses in oversight.

Bowman said the Fed needs another review — this time by an independent third party. It should cover a longer time period and more topics, such as any operational issues with discount window lending, Fedwire services and transfer of collateral from the Federal Home Loan Banks.

"This would be a logical next step in holding ourselves accountable and would help to eliminate the doubts that may naturally accompany any self-assessment prepared and reviewed by a single member of the board of governors," she wrote.