Fed officials stare down market volatility, say inflation remains paramount focus

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WASHINGTON, Sept 26 (Reuters) – Federal Reserve officials on Monday fended off rising volatility in global markets, from collapsing US stocks to currency turmoil abroad, saying their priority remains controlling domestic inflation .

Asked at a Washington Post event if he thinks US investors were overly optimistic about Fed policy leading up to a recent sharp sell-off, Atlanta Fed President Raphael Bostic said it was beside the point.

“I don’t know if they’re too optimistic or not optimistic enough… More importantly, we need to get inflation under control,” Bostic said. “Until that happens I think we’re going to see a lot of volatility in the market in all directions.” That was also true of the recent upheaval in the UK. The tax cuts proposed by the government of Britain’s new Prime Minister, Liz Truss, with their potential to further fuel inflation, raised the prospect that the country’s fiscal policy will clash with the Bank of England’s efforts to curb inflation through higher interest rates. Continue reading

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The mixed signals have sent the pound into a tailspin, adding another dose of volatility to global financial markets already coping with Federal Reserve rate hikes moving faster and higher than expected.

“The response to the proposed plan is a real issue,” Bostic said, showing the increasing uncertainty about Britain’s economic outlook. “The key question will be what this ultimately means for the weakening of the European economy, which is an important consideration for how the US economy will perform.”

In separate remarks to the Greater Boston Chamber of Commerce, Boston Fed President Susan Collins reiterated the Fed’s consensus that fighting to cool the current spike in inflation is paramount.

“Right now, inflation remains too high,” Collins said in her first policy remarks since becoming head of the bank.

While she said the pace of price hikes may have peaked or peaked, “returning inflation to target will require further tightening” of credit conditions, which the Fed affects through increases in its target federal funds rate.

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The Fed is sticking to an inflation target of 2% as measured by the personal consumption price index. From July, this index rose at an annual rate of more than 6%. August data will be released on Friday.

The US Federal Reserve last week approved a third straight rate hike of three-quarters of a percentage point. It has now raised its benchmark interest rate by a total of three percentage points this year, one of its quicker efforts to raise borrowing costs and slow the economy.

For the past few weeks, Fed officials have been adamant in their policy commentary and actions at Fed meetings that they will cut rates as much as needed to cool inflation — even at the cost of rising unemployment and a possible recession .

Some sectors of the economy have already felt the impact as home loan mortgages have doubled to more than 6%.

In recent weeks, equity markets have reflected a broader repricing amid the possibility that US interest rates will return to and remain at levels not seen in a decade.

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The S&P 500 is down 12% in just the month as Fed Chair Jerome Powell delivered a stern message at a central bank symposium in Wyoming about the economic “pain” needed to stem the fastest price increases since the 1980s.

Fed officials have often been accused of coddling financial markets but have given little indication that the current sell-off will prompt them to reconsider their policy plans as long as prices and wages continue to rise and the labor market remains strong.

“The US economy works best when there is confidence in its near- and medium-term trajectory,” Bostic said. “High inflation is undermining that.”

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Reporting by Howard Schneider; Edited by Paul Simao and Nick Zieminski

Our standards: The Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the Federal Reserve, Monetary Policy and Economics, University of Maryland and Johns Hopkins University graduate with previous experience as a foreign correspondent, economic reporter and local contributor to the Washington Post.