Fed officials stare down markets, say inflation is top focus

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

“There are interactions there,” said Loretta Mester, president of the Cleveland Fed, noting that financial market volatility can influence investor decisions and the value of the dollar affects the US economy.

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“But in terms of our goals, we will set our policy taking into account the environment we are in to get back to price stability here in the US,” Mester said after a combative speech at the Massachusetts Institute of Technology Technology, in which she argued that doing too little to curb inflation could be more costly than doing too much.

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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.”

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.

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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, with many other countries trying to follow suit .

“The reaction to the proposed plan is really worrying,” Bostic said, showing increasing uncertainty about the UK’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.”

The Federal Reserve last week approved a third straight 75 basis point hike in interest rates, raising interest rates by a total of three percentage points this year in one of its fastest efforts ever to raise borrowing costs and slow the economy.

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In recent weeks, Fed officials have insisted 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% and home sales have fallen.

MIT’s Mester was repeatedly asked about the housing market and even whether the Fed might have gone far enough, but she stood by her line.

This will “be painful,” she said, and unemployment will rise, but to bring inflation down, “we just have to raise interest rates, and interest rates will be kept higher for longer than we previously thought.”

She said she would like to see several months of monthly inflation falls before she is convinced inflation has peaked.

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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 inflation may indeed have peaked or is close to it, “returning inflation to target will require further tightening” of credit conditions, which the Fed affects by raising its target federal funds rate.

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.

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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.

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 functions best when there is confidence in… its near- and medium-term trajectory,” Bostic said. “High inflation is undermining that.”

(Reporting by Howard Schneider with reporting by Ann Saphir; Editing by Nick Zieminski and Stephen Coates)