Despite global financial market upheaval and preliminary evidence that their policies are harming the employment market, Federal Reserve officials will move on with rising U.S. borrowing costs to combat the corrosive effects of too-high inflation.
After giving a speech at Boise State University on Thursday, San Francisco Fed President Mary Daly told reporters that she is “very comfortable” with hiking interest rates to 4%-4.5% this year and 4.5%-5% next year, and that she expects rates will need to stay at that level for all of 2023.
Last week, the Federal Reserve raised interest rates to a range of 3%-3.25%, marking the most aggressive series of rate rises since the 1980s, and those ranges contain what the majority of Daly’s fellow policymakers put in their rate path estimates.
Inflation is running at more than three times the Fed’s 2% objective, so the central bank has tightened monetary policy more aggressively than was previously anticipated. This has the potential to hinder economic growth and increase unemployment. Major currencies have dropped in value versus the dollar, and stock markets throughout the world have fallen.
On Thursday, Cleveland Fed president Loretta Mester spoke on CNBC and presented a more forceful view of what is required to reduce inflation.
Mester stated that she does not see a need to pause the pace of rate rises at this time, and that the Federal Reserve would likely need to raise rates much more than it announced last week.
For this reason, Mester believes inflation will remain elevated for the foreseeable future.
Daly spoke about the market turmoil, saying that markets are “trying to get their footing” as investors weigh numerous risks such as the dysfunction in the U.K. market that prompted intervention from the Bank of England, the war in Ukraine, the damaged gas pipeline in the Baltic Sea, continued COVID lockdowns in China, and policy tightening by many central banks around the world.
What Daly really wants to know is how large of a headwind tighter financial conditions will be for U.S. growth, and how that will affect policy decisions.
While Daly has seen a slowing in the U.S. labour market, with companies reporting reduced interest in hiring new workers, consumer spending has remained strong.
Although, Daly has stated that the Fed will not need to raise rates to the point where they cause a severe recession. She said that the 3.7% unemployment rate is indicative of a healthy job market.
If people and companies begin to anticipate that inflation will continue to worsen, or if supply chains don’t recover as planned and product shortages continue to push upward on prices, Daly told reporters, “then I am prepared to do more.”
Mester said she did not expect the central bank’s attempt to reduce very high inflation through interest rate rises to be affected by the turmoil on U.S. financial markets.
So far, we haven’t seen the sort of market dysfunction, even through what’s occurring in the global markets right now, in the U.S. markets,” Mester said, adding that “no one knows for sure” if there is a major issue hiding in the financial sector right now.
St. Louis Federal Reserve President James Bullard said earlier on Thursday that he does not expect the upheaval in the U.K. markets to “actually impinge on the U.S. inflation or economic growth outcomes.”
The new administration of British Prime Minister Liz Truss’ promised tax cuts triggered a decrease in the value of the pound to an all-time low of $1.0327 on Monday. As a result of widespread concerns that the government’s strategy would further increase inflation and put Britain’s fiscal and monetary policies at conflict with each other, the pound has fallen.