Fed Officials Reinforce Rate-Hike Calls, Say Markets Got Message

(Bloomberg) — Federal Reserve officials reiterated Thursday that they will keep raising interest rates to curb high inflation, and that markets are now getting the message.

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“If you look at the points, it looks like the committee expects a good amount of additional moves this year,” said St. Louis, James Bullard, in a virtual emerging markets forum, referring to the bank’s so-called dot plot. of projections “I think that was digested by the markets and it seems to be the correct interpretation.”

He also said volatility in financial markets reflected spillovers from recent events in the UK, where the new government’s fiscal measures have seen the pound plummet, but made clear this would not cause the Fed to halt its campaign of hardening

“We are determined to get the policy rate to the right level in order to apply significant downward pressure on inflation here,” he told reporters on a conference call after his speech.

“It’s mainly the financial markets that need to price out the volatility that is being seen in the UK, so we have some movement in the US because of that,” he said. “I don’t see that really affecting U.S. inflation or the evolution of real growth.”

His hawkish stance was in line with the message from Cleveland Fed chief Loretta Mester, who said officials are resolute in their quest to raise rates to a level seen as restrictive. Both officials are voters this year on the rate-setting Federal Open Market Committee.

“Real interest rates, as judged by expectations for next year’s inflation, need to be in positive territory and stay there for some time,” he said earlier in an interview with CNBC. “We’re not even in restricted funds rate territory yet.”

Asked at a later panel discussion whether a U.S. recession would hold him back on raising interest rates, Mester said: “We’re going to do what we have to do to get the stability of the prices. So… no.”

Fed officials raised interest rates by 75 basis points on September 21 for the third consecutive meeting, bringing the target for the benchmark federal funds rate to a range of 3% to 3.25%.

Its quarterly summary of economic projections, or dot chart, shows an average forecast of rates reaching 4.4% by the end of this year, implying a tightening of more than 1.25 percentage points over the two remaining meetings in November and December.

Mester said his forecast is probably slightly above the average trajectory because he sees inflation as persistent, based on his conversations with businesses, community development groups and other sources.

“In my SEP, I have inflation coming down, but we have to raise interest rates to get that downward shift in inflation,” he said, adding that the U.S. economy has so far been able to handle higher interest rates.

Convulsion of the United Kingdom

He drew a distinction between US markets and what is happening in the UK, where the Bank of England announced on Wednesday that it would launch unlimited bond purchases to address market dysfunction. When the Fed announced its bond purchases in the early months of the pandemic, it did so at a time when it was also lowering rates to support the economy, he said.

The BOE faces some communication problems because it is raising rates but needs to buy assets, which is usually seen as a method of easing monetary policy, in order to support financial stability, Mester said.

“It’s a difficult situation for them,” Mester said. “For reasons of financial stability and for reasons of market functioning they had to go in and buy bonds.”

“The functioning of the market is incredibly important because you will not be able to achieve any monetary policy objective if the markets are not functioning,” he said. “That’s different from worrying about volatility in the markets.” Mester said that, so far, there had been no sign of dysfunction in US financial markets.

(Updates with comments from Master in the eighth paragraph.)

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