Fed Officials Won’t Relent on Path to 4.5% and May Move Higher

(Bloomberg) -- The Federal Reserve is closing ranks around a goal of quickly raising their benchmark interest rate to around 4.5% then holding it there, while being prepared to go higher if elevated inflation fails to show signs of easing.

The aim, which is widely shared among the US central bank’s 19 policymakers, suggests they are on course to deliver a fourth straight 75-basis-point rate increase next month. The impact on energy prices of OPEC oil production cuts and a strong September jobs report bolster the case, which could get a further boost from fresh inflation data on Oct. 13.

“We look to me, according to our reports, headed for 4.5% to 4.75% by sometime next year,” Chicago Federal Reserve Bank President Charles Evans, traditionally one of the central bank’s more dovish members, told business leaders on Oct. 6. The Fed’s current target range for its benchmark rate is 3% to 3.25%.

The Fed’s strategy is sensitive to data, but officials have made plain that it would take a lot to push them off the path to 4.5%: Policymaker after policymaker pushed back during the week against investor bets that recession risks or even financial market volatility could deter them.

“Until we see any signs of inflation beginning to moderate, I don’t know how we pause,” Fed Governor Christopher Waller said at the University of Kentucky Oct. 6.

While there is optimism that the case for less inflation is starting to emerge, there is also a sense that this a war the Fed can’t lose -- even at the risk of a downturn in the economy.

Officials’ September forecasts show six who expect the rates to move to a 4.75% to 5% range next year, a view that will likely gain traction if price pressures don’t relent as hoped.

A growing concern has been the persistence of underlying inflation pressures, mentioned by Governor Lisa Cook, Waller and Evans, and New York Fed President John Williams.

“Reports over the past few months have shown high inflation to be stubbornly persistent,” Cook said in her first speech as a governor. “I have revised up my assessment of the persistence of high inflation,” she said, adding that it supported her votes to front-load policy.

On Monday, Mr Musk sent Twitter a letter saying he would go through with his acquisition “pending receipt of the proceeds of the debt financing". That made it seem like there was some doubt as to whether the banks would provide their promised financing, which became a sticking point in negotiations between the company and the billionaire.

But in a court document on Thursday, Mr Musk’s team said that lawyers for the banks “has advised that each of their clients is prepared to honour its obligations".

The banking group originally planned to sell $6.5bn of leveraged loans to investors, along with $6bn of junk bonds split evenly between secured and unsecured notes. They are also providing $500m of a type of loan called a revolving credit facility that they would typically plan to hold themselves.

Of the more than $500m of losses that the banks are estimated to have on the Twitter debt, up to about $400m stems from the riskiest portion, the unsecured bonds, which have a maximum interest rate for the company of about 11.75 per cent, Bloomberg reported earlier this year. The losses exclude fees the banks would usually earn on the transaction.

The rest of the losses are estimated based on where the maximum interest rates would have been determined for the loan and secured bond when compared to the unsecured portion. The expected loss could ultimately be higher or lower.

The banking group is expected to give the cash to Twitter and become a lender to the soon-to-be highly-indebted social media giant. Morgan Stanley would hold onto the most at about $3.5bn of debt, based on the debt commitment letter