St. Louis Federal Reserve President Musalem said on the 21st that the U.S. Federal Reserve will likely need to raise interest rates further to curb inflation driven by strong demand and rising prices across a broad range of commodities, not just crude oil. In an interview with Reuters, he said that repeated supply-side factors are keeping inflation risks elevated, and that without further rate hikes, inflation is more likely than not to be running well above the 2% target a year and a half from now. Even excluding the effects of crude oil and other supply factors, underlying inflation may be running about 1 percentage point above target, he said, adding that the current policy rate level is in 'accommodative territory.' At its Federal Open Market Committee meeting on the 15th and 16th, the Fed voted unanimously to raise the federal funds rate target by 0.25 percentage point to 3.75%-4.00%, and its published projections indicated at least one more 0.25 percentage point increase this year. Musalem does not hold a vote on this year's FOMC.
Musalem says the Fed will likely need further rate hikes and current policy is still accommodative, implying a higher effective federal funds rate.
Expectations of additional Fed rate hikes push Treasury yields higher, lifting the 10Y government bond yield.
