Fed Rate Increases Have ‘A Ways to Go,’ Top Official Says

Christopher Waller, a Federal Reserve governor, added his voice on Friday to a chorus of central bank officials who favor slowing rate increases at the central bank’s Feb. 1 meeting. That most likely locks in place market expectations for a return to smaller policy adjustments after a series of jumbo rate moves.

Mr. Waller spoke on the eve of the central bank’s quiet period before its meeting, which means investors will not hear any more commentary from Fed officials before they make their rate decision. His comments were in line with what many of his colleagues have said: Several openly support slowing down rate increases at the meeting, and top policymakers who haven’t made up their minds have not ruled it out.

Central bankers raised rates rapidly in 2022, lifting borrowing costs in three-quarter-point increments for much of the year, before slowing to a half-point move in December. But they are entering a new phase that is focused more on how high interest rates rise and less on how quickly they get there. The thinking is that rates are now high enough to meaningfully slow the economy, and that adjusting them more gradually will give policymakers time to see how their policy is working.

That has nudged policymakers toward a quarter-point increase, also known as 25 basis points, an increment that was common before the pandemic.

“After climbing steeply and using monetary policy to significantly raise interest rates throughout the economy, it was apparent to me that it was time to slow, but not halt, the rate of ascent,” Mr. Waller said of the December downshift. “There appears to be little turbulence ahead, so I currently favor a 25-basis-point increase” at the Fed’s next meeting, he said.

But Mr. Waller joined his colleagues in emphasizing that rates still need to rise to ensure that inflation comes back under control.

John C. Williams, the president of the Federal Reserve Bank of New York, said Thursday that the central bank had more to do in its push to slow the economy.

While Mr. Williams welcomed a recent slowdown in inflation — and said nothing to crush expectations in financial markets that the Fed might slow rate increases at its next meeting — he also emphasized that the economy remained out of balance.

“It will take time for supply and demand to come back into proper alignment and balance, so we must keep moving,” Mr. Williams said at an event in New York. He later added that there was “a ways to go” before rates would be high enough.

“Clearly some of the readings on inflation have been encouraging,” Mr. Williams said, but he noted that the labor market remained solid. “If anything, I’ve been raising somewhat my forecast for growth.”

That would influence how high interest rates needed to rise to be restrictive enough to bring inflation back down to the Fed’s goal, Mr. Williams said.

“It seems to me that demand is still very strong relative to available supply,” he said, and the “concern” is that this would continue to put pressure on inflation.

Many Fed officials have suggested that interest rates need to rise to above 5 percent, which was their expectation when they last released economic forecasts in December. Based on market pricing, investors expect policymakers to stop earlier than that, though: They see rates rising from their current range of 4.25 to 4.5 percent to a peak of 4.75 to 5 percent before falling again by the end of the year.

While Fed officials have welcomed the cooling in price increases, they have also reiterated their commitment to lowering inflation and their judgment that the problem is not under control yet.

“We do not want to be head-faked,” Mr. Waller said Friday. “I will be looking for the recent improvement in headline and core inflation to continue.”

Inflation has been a global problem, and other top economists and central bankers from around the world have been voicing similar concerns about its potential staying power, including during panels this week at the World Economic Forum in Davos, Switzerland. Thomas J. Jordan, the head of Switzerland’s central bank, warned on Friday that it might be a challenge to get inflation all the way back to normal.

“It will be much more difficult to bring inflation from 4 percent to 2 percent,” Mr. Jordan said. Many central banks, including the Fed, target 2 percent annual inflation.

And Lawrence H. Summers, the Harvard economist and former Treasury secretary, said on the same panel in Davos that markets were being surprisingly single-minded about the way interest rates would shape up.

“I can see many, many more scenarios in which rates end up higher than what’s currently priced than I can see scenarios where rates end up lower than what’s currently priced,” he said. “Therefore, I’m a bit surprised by the market’s forecast of what’s going to happen.”