Fed Urged to Boost Inflation Credibility with Interest Rate Hikes

The recent selloff in U.S. Treasuries has prompted St. Louis Fed President Alberto Musalem to call for the Federal Reserve to boost its inflation-fighting credibility with interest rate increases.

Musalem, who is a member of the Federal Open Market Committee, told the Financial Times that 'earlier, incremental, gradual interest-rate action is preferable' than later, larger, and abrupt actions.

He expressed a preference for a quarter-percentage-point interest rate increase at this week's policy meeting, but the Fed left rates unchanged. Three of the 12 FOMC members dissented, arguing that without an immediate increase in short-term borrowing costs inflation will stay above the Fed's 2% target.

The decision drew criticism from three Fed officials who wanted a quarter-percentage-point hike instead. The interest rate decision and a hint from Fed chief Kevin Warsh that the central bank may look to change its inflation goal posts helped send 30-year Treasury yields above 5.2%, a 19-year high.

Traders are betting on a 67% chance of a 25-basis-point rate hike in September, according to CME Group's FedWatch tool.