Top Federal Reserve officials signaled they expect interest rate hikes to continue into 2023 – an indication that market optimism over a slight downtick of inflation in July could be overblown.

Chicago Fed President Charles Evans said inflation remains “unacceptably high” after federal data released Wednesday showed consumer prices jumped 8.5% last month compared to one year earlier. July inflation was down slightly from its peak of 9.1% in June.

“That’s a big number, so nobody can be happy about that,” Evans said at an event after the July data release, according to MarketWatch.

Evans said he sees the Fed funds rate rising to the 3.25% to 3.5% range by the end of this year and to 4% by the end of 2023. The benchmark is currently set in the 2.25%-2.5% range.

Minneapolis Fed President Neel Kashkari provided a similar outlook for the central bank’s plans and noted he wants the Fed’s benchmark interest rate to hit 3.9% by the end of this year. That plan indicates a series of sharp hikes at the Fed’s remaining meetings, the next of which is set for September.

Inflation is still hovering near at level in decades.
Inflation is still hovering near at level in decades.
China News Service via Getty Ima
Minneapolis Federal Reserve President Neel Kashkari
Minneapolis Federal Reserve President Neel Kashkari said the July inflation report hasn’t changed his outlook.
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Charles Evans
Charles Evans said “nobody can be happy” about 8.5% inflation.
Bloomberg via Getty Images

“I haven’t seen anything that changes that,” Kashkari said in response to the July Consumer Price Index report, according to Bloomberg.

“I think a much more likely scenario is we will raise rates to some point and then we will sit there until we get convinced that inflation is well on its way back down to 2% before I would think about easing back on interest rates,” Kashkari added. 

The 8.5% reading in July came in softer than economists expected. Major stock indices surged as optimistic investors reacted to the possibility that the Fed could dial back its plans for more sharp rate hikes.

The market is pricing in a 67.5% probability of a half-percentage point hike in September and just a 32.5% likelihood of a three-quarter percentage point hike. Prior to the Labor Department’s release, investors saw a three-quarter point hike as much more likely.

Still, the 8.5% number is well above the Fed’s target of 2% inflation.

San Francisco Fed President Mary Daly also warned it was too early to “declare victory” on inflation even as some prognosticators noted that prices have likely peaked.

Daly called a half-percentage point interest rate hike her “baseline” and signaled she hasn’t ruled out a third consecutive three-quarter percentage point hike.

“There’s good news on the month-to-month data that consumers and business are getting some relief, but inflation remains far too high and not near our price stability goal,” Daly said in an interview with the Financial Times.



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