‘Higher for longer interest rates likely’

US Fed sees need to further tighten vs inflation

WASHINGTON – The US Federal Reserve will likely need to keep interest rates higher for longer in order to firmly bring down inflation, according to a senior Fed official.

The Fed has raised its key lending rate 11 times since March 2022, lifting rates to a 22-year high as it looks to bring inflation down to its long-term target of two percent.

Higher rates lower inflation by raising the cost of borrowing, which can cause financial pain for consumers with mortgages and outstanding loans.

Despite falling sharply over the last 12 months, inflation remains stubbornly above target, leading most Fed officials to predict last month that another hike is needed this year.

“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,” Fed vice chair for Supervision Michael Barr told a conference in New York in prepared remarks.

“I expect it will take some time,” he continued, adding that his decision would be guided by “a range of incoming data.”

Barr’s comments echo the views of the majority of his colleagues, who recently lowered the number of rate cuts they expect in 2024, suggesting a longer period of high rates.

In his remarks, Barr said recent data pointed to moderating inflation, but “resilience” in economic data.

“I now see a higher probability than I did previously of the US economy achieving a return to price stability without the degree of job losses that have typically accompanied significant monetary policy tightening cycles,” he said.

He added that “the historical record cautions that this outcome could be quite difficult to achieve.”

Meanwhile, US manufacturing activity contracted in September by the least since late 2022, beating analyst expectations despite weakness in new orders, survey data showed Monday.

The Institute for Supply Management’s (ISM) manufacturing index came in better than anticipated at 49 percent last month, up from 47.6 percent in August.

This was 1.0 percent above the median expectation of economists surveyed by MarketWatch, but below the 50 percent threshold indicating growth in the sector.

“The US manufacturing sector continued its contraction trend but at a slower rate, recording its best performance since November 2022,” ISM survey chief Timothy Fiore said in a statement.

Nevertheless, September marks the 11th straight month of contraction, signaling ongoing challenges in the sector.

The Federal Reserve has been on an aggressive campaign of interest rate hikes since March last year to tackle high inflation, and this hits consumer demand.

“Manufacturing faces headwinds from higher borrowing costs and tighter credit conditions,” High Frequency Economics chief US economist Rubeela Farooqi wrote in a note to clients.

“But an onshoring of supply networks and investment in domestic manufacturing capacity could provide support to factory activity over time,” she added.

The passage last year of the Inflation Reduction Act – President Joe Biden’s signature legislative achievement – has led to a boom in investment across the United States as firms take advantage of generous new tax breaks.