On Friday, a high-ranking official from the Federal Reserve made a significant statement, indicating that the battle against inflation had made minimal headway over the past year. This remark reinforced the idea that additional interest rate increases are necessary to bring escalating prices into check.

The official, Christopher Waller, who holds a seat on the Federal Reserve’s governing board, didn’t provide specific details about how many more rate hikes he would endorse. Yet he made it clear that he believes inflation levels are still alarmingly high, emphasizing that his responsibilities in managing inflation are far from over.

Slight Deceleration in Inflation Noted, Core Prices Still Rising

In the previous month, inflation experienced a slight deceleration, primarily due to decreasing food and gasoline prices. However, once these unpredictable categories were removed from the equation, the remaining “core” prices continued their upward trajectory. They are currently standing at a staggering 5.6% higher compared to the same time a year ago. Waller noted that the core prices have been escalating at an approximately similar, if not faster, rate since the final month of 2021.

These comments from Waller, which show his strong endorsement for further interest rate hikes, come on the heels of a prediction made by the Federal Reserve’s in-house economists. As mentioned in the Fed minutes released this past Wednesday, these economists anticipate a “mild recession” to hit sometime later in the current year.

Waller, like the majority of his peers, has his eyes trained on the potential ripple effects of the recent collapse of two sizeable banking institutions. He’s particularly interested in whether this will prompt the larger banking sector to scale back on their lending activities, a move that could potentially hamper economic growth.

Nevertheless, at this stage, the full extent of the potential impact remains uncertain. Waller stressed that despite these developments, the job market continues to demonstrate robust growth, and inflation rates are still significantly outpacing the Fed’s target of 2%. These factors, he insists, necessitate further tightening of monetary policies.

Fed Board Members’ Consensus: Additional Rate Increase Needed

Waller’s sentiments, which he delivered in San Antonio, Texas, resonate with those expressed by several of his fellow board members in recent weeks. They have collectively voiced support for at least one additional rate increase. This move would drive the Fed’s benchmark interest rate to around 5.1%, marking the highest level in over a decade and a half.

Waller further emphasized his backing for maintaining an elevated benchmark rate for a more extended period than what the investors are currently anticipating. Traders dealing in interest-rate futures are predicting that the central bank will hike rates one more time at the upcoming Fed meeting scheduled for May. They then expect three rate cuts by the end of the year, as reflected by the CME Fedwatch tool.

Economy Likely to Slip into Recession, Predict Market Analysts

These forecasts are likely based on the expectation that the economy will slip into a recession, necessitating a shift by the Fed towards lowering interest rates.

However, Waller presented a contrasting view, arguing that the sluggish progress in controlling inflation implies that “Monetary policy will need to remain tight for a substantial period of time, and longer than markets anticipate.”

Despite this, Waller did share a sliver of optimism. He specifically pointed to the recent inflation report released on Wednesday, which indicated a slowdown in the growth rate of rental prices, following several months of steep increases. The surge in new apartment constructions, coupled with a slight rise in vacancies, has prompted developers to reduce rents on new leases.

As Waller explained, if these trends persist and continue to be reflected in the government’s rental price data, it will contribute to a further decrease in inflation. He projected that by the conclusion of the current year, inflation could potentially drop to as low as between 3% and 3.5%.