Senior Fed officials confirmed plans to squeeze the economy by raising interest rates

Top US central bank officials have sought to quash speculation that the Federal Reserve will decline the task of squeezing the economy more forcefully, warning against getting too excited about the inflation outlook despite signs it has peaked.

Speaking just days after the central bank slowed the pace of its policy tightening and raised the federal funds rate by half a percentage point, the heads of the New York and San Francisco branches of the Federal Reserve responded to what they called an “optimistic” investor view that high inflation will be close to disappearing next year, especially after the data. The last positive.

They were joined by Loretta Mester, President of the Federal Reserve Bank of Cleveland, who also took a hawkish tone on the path of inflation and what it would take for the Fed to restore control of prices.

While acknowledging that price pressures will decline, New York Federal Reserve Bank President John Williams expressed concern that inflation across the “core” services sector, which excludes volatile energy and food costs and reflects continued strength in the labor market, will prove elusive and difficult to stamp out.

“We have some factors that I think will bring inflation down to 3 to 3.5 percent next year, but the real problem is how do we get to 2 percent?” [per cent]Williams said in an interview Friday with Bloomberg Television.

San Francisco Fed President Mary Daly stressed that the Fed still has a “long way to go” before declaring victory over inflation, and said risks remain “to the upside” regarding further price pressures. She said at an event on Friday hosted by the American Enterprise Institute that the central bank will continue to pressure the economy until “the job is done really well on inflation.”

Specifically, Daley said she needs to see basic service inflation, once housing-related costs are removed, moderate.

Meester, in an interview with Bloomberg Television, said there are only “temporary” signs so far that inflation is beginning to level off. She said she needed to see the “cumulative evidence” before feeling more confident that price pressures were easing.

According to projections published Wednesday, most officials expect the federal funds rate of 5.1 percent to be enough to bring down inflation, while a large group has indicated it may have to go above 5.25 percent. That compares with the median estimate of 4.6 percent from September, the last time the forecast was updated.

Mester confirmed that she supports the federal funds rate rising more than the median forecast and for it to remain elevated through at least the end of 2023.

“We’re going to have to do what’s necessary — again restrained enough — to bring inflation down to 2 percent, and it could be higher than we wrote,” Williams said, echoing a message from Chairman Jay Powell at his last press conference of the year on Wednesday.

“I’m prepared to do more if more is required,” Daly said when asked how much more restraint the Fed might need over the economy. “We have to rely on the data. We can predict, but then we have to watch.”

However, investors remain skeptical, with traders in the fed funds futures markets continuing to bet that the central bank won’t need to push its policy rate higher than 5 percent. They also confirmed bets that the Fed will ease policy next year and lower interest rates.

No Fed official has started to cut interest rates next year, as the policy rate is expected to drop to just 4.1 percent in 2024.

A warning from the European Central Bank of more rate hikes to come as it and the Bank of England raised interest rates sent global stocks crashing Thursday and delivered the S&P 500 its biggest one-day drop since early November. On Friday, the index closed down by 1.1 percent.