The U.S. central bank is entering a new phase of policy tightening that will be more difficult to manage, a senior official has warned, as pressure mounts on the Federal Reserve to temper what has become one of its toughest campaigns. aggressively raising interest rates for decades.
“This next phase of policy making is much more difficult because you have to be aware of so many things,” San Francisco branch president Mary Daly told the Financial Times.
“You have to be aware of the cumulative crunch that is already in the system. We must be aware of the shifts in monetary policy. You need to be aware of the risks to the whole global economy and the enormous uncertainty we even have about the course of inflation.
Daly is among a growing cohort of officials to support a slower pace of rate hikes. This is partly because of the tightening already underway, but also because it takes months for the full effect of policy adjustments to be felt and even longer to show up in economic data. Interest rate-sensitive sectors like housing are already reeling under the weight of higher borrowing costs, but broader price pressures remain elevated and the labor market tight.
In less than a year, the Fed has raised the federal funds rate by 3.75 percentage points, relying on dizzying increases of 0.75 percentage points to catch up with inflation that has constantly surprised by its intensity.
With the benchmark policy rate now hovering at a level considered “moderately restrictive” for economic activity – between 3.75% and 4% – Daly said the challenge the Fed now faces is determining what level of rate will be “sufficiently restrictive”. bring inflation back to the central bank’s 2% target.
“If I can do one thing for the public, I would say: stop thinking about rhythm and start thinking about level.”
Jay Powell, the chairman, said this month that the Fed could moderate the pace of tightening as early as the next rally in December, but stubbornly high inflation likely means the level at which the fed funds rate will cap will be higher than expected. . . Daly declared a “terminal” rate of “at least 5 [per cent] is probably probable”.
Federal Reserve Governor Chris Waller said Monday morning at a UBS conference in Australia that rates will “keep going up” and “stay high for a while until we see that inflation coming closer. of our goal”.
When asked if rates could reach 5%, Waller replied, “It depends on what happens with inflation. If inflation does not decline or rebound, we may need to increase . . . Right now, inflation determines where that number will end up.
In his interview, Daly said the Fed is also focusing on how long to keep the policy rate tight enough.
“If I can hold it there [at an elevated level] for a year and really think inflation is coming down, so that’s probably a reasonable rate to stop at,” the San Francisco chief said. “Overnight to 2% is not my goal . . . but we can’t be so patient that inflation continues to erode the real purchasing power of Americans.
Moving too slowly to stamp out inflation also risks destabilizing future inflation expectations to a degree that would force the Fed to take tougher action, warned Daly, who maintains the Fed will be able to avoid losses in the future. jobs similar to a “severe recession”.
Citing massive layoffs at tech companies including Meta, Stripe and Lyft, she argued that “rebalancing” there seemed specific to the tech sector as opposed to a sign of something broader. “They were very excited about the growth rates they saw during the pandemic and they hired as if those growth rates were going to last forever, and then those growth rates returned to more traditional levels.”
Beyond the economic pain, another concern is the financial distress that is forcing the Fed to intervene even as it continues its efforts to fight inflation – something the Bank of England was recently forced to do after the blocking of the UK government bond market. The lesson, according to Daly, is that making distinctions between monetary and financial stability tools “can be done, but it makes communications very difficult.”
Asked about the turmoil that has gripped cryptocurrencies, Daly said the central bank is paying attention to where “cross-contamination” may emerge between businesses and retail and institutional investors, but does not currently see any “ big risk” to financial stability, with people continuing to reduce their exposure.
“Each time this happens, we hope the impact on the general financial system and retail and wholesale investors will be less.”
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