Federal Reserve officials quelled what had been rising market expectations for an aggressive initial response to 40-year-high US inflation, signalling that steady interest rate hikes should be enough to do the trick.
"I don’t see any compelling argument to taking a big step at the beginning," New York Federal Reserve Bank president John Williams, the No 2 official on the central bank's policy-setting panel, told reporters after a speech.
"I think we can steadily move up interest rates and reassess," he said during the online event.
Fed governor Lael Brainard – US President Joe Biden's nominee to be vice chairwoman at the Fed – said officials will likely begin a "series of rate increases" at their coming meeting in March, followed by decreases in the size of the Fed's balance sheet "in coming meetings".
Ms Brainard, speaking at a conference in New York, did not give a specific recommendation for the coming meeting, but said recent changes in financial markets, including a rise in mortgage rates, were "consistent with" where the Fed is heading.
"The market is clearly aligned with that and brought forward the changes in financing conditions in a way that's consistent with our communications and data," she said.
Investors in federal funds futures contracts last week began leaning towards the idea the Fed would raise rates a half-a-percentage point in March. Those expectations have now drifted back, with a quarter point hike now anticipated and six increases in total over the year.
In remarks at the conference in New York, Chicago Fed president Charles Evans downplayed the thought the Fed needed to get more aggressive, even though he agreed policy was "wrong-footed" with annual consumer price increases topping 7 per cent.
He said he remained convinced inflation would ease on its own.
"I see our current policy situation as likely requiring less ultimate financial restrictiveness compared with past episodes and posing a smaller risk," Mr Evans said at a separate New York event.
"We don’t know what is on the other side of the current inflation spike ... we may once again be looking at a situation where there is nothing to fear from running the economy hot."
The remarks came at the end of a tumultuous week in which traders piled into, and then backed away from, bets that the Fed would begin a round of rate hikes next month with a bigger-than-usual half-point increase.
St Louis Fed president James Bullard had fanned those expectations with a call for raising rates by a full percentage point by the Fed's June meeting, a rate path that would require at least one half-point hike between now and then.
Policymakers at the central bank have all but said they will start raising borrowing costs next month to quell inflation that has raced past their 2 per cent target, and economists expect the Fed to kick off the longest series of rate hikes in decades.
Fed chairman Jerome Powell has not spoken publicly since January, so Mr Williams' and Ms Brainard's comments provide the best steer yet on the prevailing view at the Fed's policy-setting core.
Mr Powell, however, will have a chance to shape expectations on March 2 and 3 when he gives his semi-annual monetary policy update to Congress in hearings announced on Friday by the House Financial Services Committee and Senate Banking Committee.
The Fed should begin raising rates next month and, once rate increases are under way, begin to "steadily and predictably" trim its $9 trillion balance sheet, Mr Williams said. Both actions, he said, will bring demand into better balance with supply.
At the same time, he said, other forces should also be bringing down inflation, with supply chains healing and consumers returning to pre-pandemic spending patterns.
Mr Williams said policymakers can speed up or slow down the pace of rate increases later as needed. A path in which the overnight federal funds rate moves to a range of 2 per cent to 2.5 per cent by the end of next year makes sense, he said.
Williams said he expects real US GDP to grow by slightly less than 3 per cent this year and for the unemployment rate to drop to about 3.5 per cent by the end of the year. He projects inflation as measured by the personal consumption expenditures price index to decline to about 3 per cent and for it to fall further next year as supply challenges improve.