Federal Reserve Bank of Kansas City President Esther George said the U.S. central bank should raise its benchmark interest rate above 5% and hold it there well into 2024 to bring inflation down.
“I have raised my forecast over 5%,” George said Thursday in an interview on CNBC television, referring to her projection for the federal funds rate. “I see staying there for some time, again, until we get the signals that inflation is really convincingly starting to fall back toward our 2% goal.”
Asked if that was a projection that it would be appropriate to hold the federal funds rate above 5% well into 2024, she said, “it is for me.”
The Fed last year raised its benchmark interest rate from nearly zero in March to 4.3% by its final meeting in December, marking the highest level since 2007. Officials on the central bank’s policy-setting Federal Open Market Committee forecast at the meeting that it would be appropriate to raise the federal funds rate to 5.1% in 2023, according to their median projection.
In 2022, inflation rose to the highest levels in four decades before beginning to recede in the final months of the year. But Fed officials have homed in on services prices, which they see as closely linked to wages, as an area where inflation remains elevated.
“Where we really see the persistence in that inflation seems to be in the non-housing part of the services side of the economy,” George said. “So, I think that’s going to be where I’ll be watching for the real clues to see whether we are getting traction with our policy in that area.”
The Kansas City Fed chief, who will retire this month after 11 years at the helm of the bank, warned that the Fed’s campaign to bring inflation down could result in an economic downturn.
“I’m not forecasting a recession, but I’m quite realistic that when you see below-trend growth — and the idea that our instrument is going to work on demand, bringing that down — it doesn’t leave a lot of margin there,” George said. “Not my forecast, but I do understand that bringing demand down creates that sort of possibility.”