Two More Rate Hikes This Year? A Federal Reserve Bank CEO Says It’s Possible

WASHINGTON — The Federal Reserve, the central banking system of the United States, is currently facing several significant challenges in its efforts to maintain a stable and robust banking system. 

The panel of Federal Reserve governors voted unanimously last month to keep rates steady while anticipating at least two more hikes before the end of 2023. This was the first time the Fed chose not to raise rates after 10 consecutive increases, and the minutes of the governor’s most recent meeting — released this week — outline how the agency might be approaching monetary policy in the months ahead. 

In a recent discussion at the Hutchins Center on Fiscal and Monetary Policy at Brookings Institution, Mary Daly, the president and CEO of the Federal Reserve Bank of San Francisco, one of 12 reserve bank presidents and the one who represents about a fifth of the U.S. population, offered her take on the current economic situation in the U.S. 

“One of the surprising things about the economy is just how much momentum it continues to have,” Daly admitted, adding, “I think it’s a very reasonable projection to say a couple more rate hikes will be necessary.”

Daly, as a labor economist and a key decision-maker in the Federal Reserve, stressed the importance of being mindful of the risks associated with monetary policy decisions.

“We have to be data-dependent right now to understand how to really make policy,” she said, as she expressed concern about persistently high inflation rates.

The extensive support provided to the economy during the pandemic, both by the Federal Reserve’s monetary policies and fiscal measures, along with savings by individuals as a result of the inability to spend their money as usual over the last several years, has resulted in pent-up demand. However, the supply side of the economy has struggled to keep pace, leading to increased inflationary pressures.

Furthermore, the failure of three major banks, in addition to those inflationary challenges that continue post-COVID, pose significant risks to the overall health of the economy.

Daly called it a “treadmill of indignity,” saying that in her personal “Sunday Talks” with everyday Americans at retail stores, she gains valuable perspectives on the impact of inflation on individuals’ lives. 

“I keep hearing — the same things for well over a year — Inflation is our number one problem” and that people continue to “work hard and do everything you are supposed to do, but inflation erodes” any gains they may be able to make in their personal financial circumstances. 

She advocated for the need to raise interest rates further to rein in the economy but also acknowledged the importance of a cautious approach to avoid adverse effects on economic growth.

“Over the course of time … I see the risks as more balanced,” Daly said. “Today, we’re still not at 2%, our target. The risks of doing too little are outweighing the risks of doing too much, but that gap is getting narrower and narrower.”

She predicted future rate hikes, though with a slower pace for more accurate evaluation, saying the Fed might “turn back the dial on the speed at which we adjust so we have more time to assess the economy.”

“In my mind, the risks have become more balanced. Last year, the risks were on … doing too little and we would end up with persistently high inflation — which is essentially a tax on those least able to bear it,” she said.

Along with the interest rate increases, there are growing concerns that banks across the country are conserving capital by lending less, leading to a potential credit crunch. This reduction in lending can amplify the negative effects of the Fed’s rate increases on economic growth. 

If banks continue to tighten their lending standards, it could hinder the availability of credit for businesses and individuals and impede economic expansion.

“The data we get from published sources, by and large, are telling us what happened last month or the last several months … but what we really need … is to look forward,” Daly said.

“Things are getting better, but we’re not there yet. It’s too early to declare victory.”

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