Fed’s Bostic says events in UK could raise economic stress in Europe, U.S.

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WASHINGTON – Events in the United Kingdom, with new government budget plans triggering a rapid sell-off in the British pound, reflect increasing uncertainty about the direction of the country’s economy and could result in greater economic strain in Europe and the United States, Atlanta Fed Das said President Raphael Bostic on Monday.

“The response to the proposed plan is one of real concern and a fear that the new measures will make the economy unsafe,” Bostic said in a webcast interview with The Washington Post. “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.”

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“These are just suggestions and we haven’t seen what will develop from them,” Bostic said.

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.

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 US Federal Reserve

approved last week

a third rate hike in a row by 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.

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Bostic, the first Fed official to address events in the UK, gave no indication that the Fed might react in any way.

Rather, he said, the Fed’s focus will remain fixed on controlling inflation in the United States. The volatility seen recently in US equity markets, as well as FX markets from the UK to Japan, may well continue until that happens.

“The most important thing is that we have 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.” (Reporting by Howard Schneider; Editing by Paul Simao)