Fed faces tough task deciding when to stop raising rates, official warns

The US central bank is entering a new phase of tightening that will be difficult to navigate, a senior official has warned, as pressure mounts on the Federal Reserve to temper what has been one of its toughest interest rate hike campaigns in years.

“The next stage of policy making is very difficult, because you have to remember a lot of things,” Mary Daly, president of the San Francisco branch told the Financial Times.

“You have to keep in mind the additional tightening that is already in the system. You have to keep in mind the tightening of the monetary policy. You have to keep in mind the risks around the world and the great uncertainty we have about what inflation is going to be.”

Daly is one of the officials who is growing to reduce inflation. This is partly due to the already tight train, but also because it takes months for the full impact of policy changes to be felt and more time to be reflected in the economy. Interest-sensitive sectors such as housing are already falling due to higher mortgage rates, but interest rates are rising and the labor market is tight.

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Less than a year later, the Fed raised the federal funds rate by 3.75 percent, relying on a 0.75 percent volatility to create a base against inflation that has been consistently surprising.

With the policy rate now hovering at what appears to be a “slightly restrictive” rate for the economy — between 3.75 percent and 4 percent — Daly said the challenge the Fed now faces is determining which rates will be “restrictive enough” to bring inflation back to 2 central bank percentage.

“If I could do one thing for people, I would say: stop thinking about speed and start thinking about age.”

Jay Powell, the chairman, said this month that the Fed may reduce the pace of tightening as soon as the next meeting in December, but the rising rate of interest means that the rate of the fed funds will be higher than expected. . Daly said the “terminal” level is “at least 5 [per cent] it is possible”.

Federal Reserve Governor Chris Waller told a UBS conference in Australia on Monday morning that rates would “go up” and “stay for a while until we see that inflation is getting closer to what we want”.

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When asked if rates could hit 5 percent, Waller replied: “It depends on what happens with inflation. If inflation doesn’t go down or goes down again, we could go up. . . . Right now inflation is driving that number.”

In his interview, Daly said the Fed also looked at the longer term to keep the interest rate at a restrictive level.

“If I can hold it there.” [at an elevated level] “For a year, I think inflation is going down, so maybe it’s worth enough to stop it,” said the San Francisco official. the American people.”

Moving too slowly to remove inflation also risks future inflation that makes the Fed more aggressive, warned Daly, who hedges against job losses in the form of a “recession”.

Referring to the layoffs at tech companies, which have included Meta, Stripe and Lyft, he said the “restructuring” appears to be unique to the tech sector rather than a sign of the broader industry. “They were very excited about the threats they saw in the outbreak and they hired as if the threats were going to last forever, then the threats came back in many situations.”

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Beyond the financial crisis, another concern is the financial crisis that is prompting the Fed to intervene despite efforts to tackle inflation – something the Bank of England was forced to do recently after the UK bond market seized. The lesson there, according to Daly, is that the distinction between sustainable and financial instruments “can be done, but it makes communication very difficult”.

When asked about the chaos that caught cryptocurrencies, Daly said that the central bank is paying attention to where “cross contamination” may arise between companies and traders and institutions, but at the moment they do not see a “big threat” to the stability of the economy, and people continue to reduce their exposure.

“Whenever this happens, hopefully the impact on the economy and the retailers and retailers will be less.”


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