Fed Faces Double Dilemma: Raise Rates Another Notch Next Month? How Officials View It

John Williams: Many indicators are suggesting that the economy is improving, and may even continue to trend upwards, but at the same time, there are concerns about the risks associated with tightening credit.

In the March meeting of the Federal Reserve, interest rates were raised by 0.25%. Although the market had anticipated another 0.25% rate hike in the following month before halting further increases, the actual decision will depend on economic data, especially as the Fed seeks to strike a balance between "reducing inflation" and "tightening credit," a task likened to the difficulty of choosing between saving one's mother or girlfriend who has fallen into water.

If another 0.25% rate hike occurs next month, the Federal Funds rate in the United States would rise to 5% (5%~5.25%), the first time interest rates have exceeded 5% since 2007. However, Fed officials have not explicitly stated at what level of interest rates inflation can be controlled, emphasizing instead the need to adjust based on data. This reflects the uncertainty in the economy, as the Fed aims to maintain flexibility and ambiguity.

John Williams, President of the New York Federal Reserve Bank, stated that economic uncertainty is "two-sided."

While economic indicators show positive developments, job growth has slowed and wage growth has also decelerated. However, employment and wage indicators still exceed the targets set by the Fed, and core inflation (Core CPI) remains alarmingly high.

An improving economy suggests the possibility of rate hikes, but the Fed is also concerned about the risks of credit tightening that may result from further rate increases, leading to conflicting opinions among Fed officials.

Fed Board member Christopher Waller believes that at least one more rate hike should occur in May, as data shows limited progress in reducing inflation.

However, Patrick Harker, President of the Philadelphia Federal Reserve Bank (with voting rights), believes that there is no need for another rate hike in May. This is because monetary policy operates with a lag, and rate hikes do not immediately impact the economy, warranting a cautious approach. Austan Goolsbee, of the Chicago Federal Reserve Bank, also supports Patrick Harker's view.

Patrick Harker: I don't understand why we have to keep raising rates, all the way until the economy weakens, things go bad, and then we rapidly cut rates.

Interest rate decisions are quite challenging. David Wilcox, former head of research and statistics at the Federal Reserve, believes that even during peacetime, monetary policy decisions are prone to errors, and the current credit tightening in banks further complicates decision-making.

The current challenge for the Federal Reserve is to strike a balance between economic recession and controlling inflation. The current consensus is that after a 0.25% rate hike in May, the Federal Reserve will pause further increases, maintaining the Federal Funds rate between 5%~5.25% to "sustain high rates" instead of continuously raising them. By then, the cryptocurrency market may need to find a new indicator to replace CPI as the basis for judging price fluctuations.