Former Fed Vice Chair "Interest rates could rise two more times"...Don't be complacent even if prices fall

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A forecast has emerged that the US benchmark interest rate could rise two more times this year or early next year.

Roger Ferguson, former Vice Chair of the Federal Reserve (Fed) and a prominent economist, said in a video released on August 6 (local time), “I don't expect three rate hikes. However, I am open to the possibility of two rate hikes this year or early next year.” He believes that inflationary pressures may not subside quickly enough and that the Fed leadership will seek to maintain policy credibility. The possibility that oil prices may not fall rapidly or that supply disruptions may continue was also cited as a basis for further rate hike forecasts.

He acknowledged recent positive signals in housing costs, service prices, and wage pressures. However, Ferguson drew a line, stating, “It's different for inflation to be slightly below 3% versus reaching 2%.” He explained that it is still difficult to determine whether inflation will definitively move towards the Fed's 2% target within the next three to five quarters. He described the current situation as “an improvement from a very bad starting point.”

He also pointed out that changes are needed in the Fed's communication style. He argued that some policy signals, including the dot plot, are confusing the market, and the Fed needs to explain more clearly how it will respond to changes in economic indicators. Ferguson said that while the market is not demanding definitive interest rate promises, it expects a certain level of transparency regarding how the Fed responds to policy. He also emphasized that the division of roles, with the Fed leading monetary policy and the Treasury leading fiscal and dollar policy, should be maintained.

He viewed discussions between the President and the Fed Chair on economic conditions as not unusual. He explained that there have been frequent exchanges of views between Presidents and Fed Chairs in past administrations. However, he pointed out that the President directly demanding changes to monetary policy, such as interest rates, is clearly outside the permissible scope. Ferguson stated that since the current administration has strongly criticized Fed policy, Fed Chair Kevin Warsh must clearly demonstrate policy independence.

Business sentiment has moved away from recession fears but has not turned to clear optimism. In surveys by the Conference Board and the Business Council, CEO confidence shifted slightly from negative to positive territory. Ferguson described this as “a cautious improvement, not a significant surge.” There were no major changes in capital expenditure and hiring plans, and cybersecurity was identified as the top risk by CEOs. Artificial intelligence (AI) rose to become the second risk factor, surpassing geopolitical risks.

[Article Key Summary]

-Ferguson suggested the possibility of two more US benchmark interest rate hikes this year or early next year.

-He assessed that even if inflation falls below 3%, it is too early to be confident about achieving the Fed's 2% target.

-Business confidence slightly improved, but capital expenditure and hiring plans remained stagnant, with cybersecurity identified as the top risk.

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