Fed official expects rates to stay high 'for some time'

Federal Reserve officials have signaled that one more quarter-point rate increase is likely this year, but a key official said Oct. 2 that the bigger focal point is now how long the central bank will need to keep rates elevated in order to fully curb inflation.

"Given how far we have come, we are now at a point where we can proceed carefully as we determine the extent of monetary policy restriction that is needed," said Michael S. Barr, the Fed's vice chair for supervision, during a speech at the Forecasters Club of New York. "In my view, the most important question at this point is not whether an additional rate increase is needed this year or not, but rather how long we will need to hold rates at a sufficiently restrictive level to achieve our goals. I expect it will take some time."

The Federal Open Market Committee at its most recent meeting on Sept. 20 left the federal funds rate unchanged at a range of 5.25% to 5.5%. The committee in recent months has alternated between hikes and pauses — it approved a quarter-point increase at its previous meeting in July but did not raise rates in June.

Since March 2022, the Fed has raised the funds rate, which is now at its highest level since 2001, 525 basis points.

Committee members last month signaled that one more rate increase is expected this year; the Fed meets Oct. 31-Nov. 1 and again in December. But members also forecasted that they'll have to keep rates higher for longer. By the end of 2024, the committee's median projection in September for the funds rate was 5.1%, up from 4.6% in June, and by the end of 2025 it was 3.9%, up from 3.4% in June.

"It is likely that we'll need to keep rates up for some time in order to be effective in bringing inflation down to 2%," Barr said during a question-and-answer session Oct. 2. "I'm confident that we'll get there, I'm 100% committed to getting there, and I believe we'll get there, but I think we're going to need to hold rates (high)…for some time" to achieve that objective.

Data from the Bureau of Labor Statistics showed that the consumer price index rose 3.7% in August from a year earlier, above the 3.2% year-over-year increase in July. The September numbers are slated for Oct. 12.

Barr said he anticipates seeing the impact of the Fed's tightening strategy soon. "While these lags are difficult to estimate, I expect that the full effects of past tightening are yet to come in the months ahead," he said.