Several regional Fed presidents offered differing views Wednesday on whether interest rates could still go higher, again revealing a divide among central bank officials about next steps.
Atlanta Fed president Raphael Bostic said in an essay Wednesday that he has more confidence that inflation will continue to drop over the next year, implying the Fed could be done raising interest rates if his prediction holds.
But Cleveland Fed President Loretta Mester and Richmond Fed President Tom Barkin made it clear that hikes are still on the table if the economy remains too hot and inflation doesn't cool.
Mester said in a speech that monetary policy "is in a good place." But she added that "whether the fed funds rate needs to go higher than its current level and for how long policy needs to remain restrictive will depend importantly on whether the economy is evolving as expected."
Barkin told CNBC that if inflation comes down "there’s no particular need to do anything with interest rates" but if it flares back up "I think you want to have the option of doing more on rates."
Bostic was much clearer about his expectation that inflation will continue to drop. His reason for this forecast is his belief that there is still bite left from the Fed's aggressive rate-raising campaign that could slow the economy and push inflation lower.
"I’m sensing greater clarity about a few important currents. One is the direction of inflation. There’s no question the rate of inflation has slowed materially over the past year-plus," Bostic wrote in an essay published Wednesday.
Research done by the Atlanta Fed and input from business leaders "tell me the downward trajectory of inflation will likely continue."
Fresh anecdotal information released by the Fed Wednesday reinforced Bostic's view.
The Fed's Beige Book showed the economy slowed in November from October, with six districts noting slight declines, and the outlook for the next six to 12 months weakened. Demand for workers also continued to ease while consumers were more sensitive to prices.
Another sign that inflation is declining even as the economy surprises to the upside came from new data released Wednesday by the Bureau of Economic Analysis.
The US economy grew at a 5.2% annualized pace in the third quarter, revised up from the 4.9% reported in the advance estimate a month ago. But the quarterly reading for Personal Consumption Expenditures (PCE) showed core prices, which exclude volatile categories like food and energy, grew at a 2.3% pace during the third quarter, down from an initial reading of 2.4%.
The release showed inflation continues to cool towards the Fed's long-run goal of 2% inflation.
The last time the Fed's Federal Open Market Committee met, it elected to keep interest rates unchanged in a range of 5.25%-5.50%, a 22-year high. It meets for the last time this year on Dec. 12-13.
Investors do not expect the Fed to vote for additional hikes, but the majority of the rate-setting committee penciled in one more rate hike this year when it last published forecasts in September, leaving the last meeting in mid-December a possibility.
The comments made by various Fed officials Wednesday marked the second straight day of apparent divisions within the central bank about whether rates still need to go higher.
Two Fed governors in separate speeches Tuesday also offered different approaches to getting inflation down.
One came from Fed governor Michelle Bowman, who said she thinks the Fed will have to raise rates further to bring inflation down to the Fed's 2% target "in a timely way."
The other was from Fed governor Christopher Waller, who said he is becoming more confident rates are at the right levels even though he needs more data to be sure.
One of the reasons Bostic said he believes inflation will continue to drop is that he doesn’t think the hot economic data seen in the third quarter — third quarter GDP was revised up to 5.2% Wednesday — is sustainable given how high interest rates are.
“I simply don’t think that kind of blockbuster expansion is durable given the current restrictive stance of monetary policy in combination with tight financial conditions,” he said. “I don’t think we’ve seen the full effects of restrictive policy.”
Bostic said he and his staff are picking up clear signals that it’s no longer easy to raise prices without resistance from customers, diminishing companies’ pricing power.
On the consumer side, Bostic believes consumer spending will slow with lower wage growth and pandemic-era savings being spent down.
The Atlanta Fed forecasts inflation to decelerate to 2.5% by the end of 2024 and closer to 2% by the end of 2025.
Mester in her speech Wednesday said that while inflation is still above the Fed's target "there has been discernible progress on inflation even while the overall economy has remained relatively strong. It will take some time to get inflation back down to 2 percent, but the FOMC is committed to doing so."