Fed officials eye markets down, say inflation is priority

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WASHINGTON, Sept 26 (Reuters) – U.S. Federal Reserve officials on Monday put an end to rising volatility in global markets, from falling U.S. stocks to currency turmoil overseas, and said their priority remained control. domestic inflation.

“There are interactions there,” said Cleveland Fed President Loretta Mester, noting that volatility in financial markets can affect investor decisions and the value of the dollar impacts the economy. American.

“But in terms of our objectives, we will define our policy, taking into account the environment in which we find ourselves, in order to return to price stability here in the United States,” Mester said after a hawkish speech. at the Massachusetts Institute of Technology in which she argued that it might be more costly to do too little to contain inflation than to do too much.

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When asked at a Washington Post event whether he felt U.S. investors had taken an overly optimistic view of Fed policy until the start of a recent hard sell-off, the Fed Chairman of Atlanta, Raphael Bostic, said that was not the question.

“I don’t know if they are too optimistic or not optimistic enough… The most important thing is that we have to get inflation under control,” Bostic said. “Until that happens, we’re going to see, I think, a lot of volatility in the market in all directions.” The tax cuts proposed by the government of new British Prime Minister Liz Truss, with their potential to further stoke inflation, have raised concerns that the country’s fiscal policy will clash with the Bank of England’s efforts to control price increases with higher interest rates. Read more

The mixed signals sent the pound plummeting, adding another dose of volatility to global financial markets already grappling with Federal Reserve interest rate hikes accelerating and higher than expected, with many other countries rushing to follow suit.

“The reaction to the proposed plan is a real concern,” showing heightened uncertainty about the UK’s economic outlook, Bostic said. “The key question will be what it means to ultimately weaken the European economy, which is an important consideration for the performance of the US economy.”

The U.S. central bank approved a third consecutive 75 basis point rate hike last week, raising its key rate by a total of three percentage points this year in what has been one of its fastest efforts to raise borrowing costs and slowing the economy.

In recent weeks, Fed officials have insisted they will push rates as far as necessary to calm inflation, even at the cost of rising unemployment and a possible recession.

Some sectors of the economy have already felt the blow, with mortgages on home loans doubling to more than 6% and home sales falling.

MIT’s Mester was repeatedly asked about the housing market, and while the Fed might have gone far enough already, it stuck to its guns.

It’s “going to be painful,” she said, and unemployment is going to rise, but to bring inflation down, “we’re just going to have to raise rates and rates are going to be held longer than we previously thought. “.

She said she would like to see several months of month-to-month declines in inflation before she is confident that inflation has peaked.

In separate remarks to the Greater Boston Chamber of Commerce, Boston Fed Chair Susan Collins echoed the Fed’s consensus that the fight to calm the current surge in inflation was paramount.

“At the moment, inflation remains too high,” Collins said in her first policy remarks since taking over as bank helm.

While she said she believed the pace of price increases could indeed be at or near its peak, “getting inflation back on target will require a further tightening” of credit conditions, which the The Fed is influencing through increases in its target federal funds rate.

The Fed is maintaining an inflation target of 2%, as measured by the personal consumption expenditure price index. In July, this index was increasing at an annual rate of more than 6%. August data will be released on Friday.

In recent weeks, equity markets have reflected a broader reassessment on the possibility that US interest rates will return to levels not seen in a decade and stay there.

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

Fed officials have often been accused of coaxing financial markets, but have given little indication that the current sell-off will cause them to reconsider their policy plans as long as prices and wages continue to soar and the labor market will remain solid.

“The U.S. economy performs best when there’s confidence in … its short to medium-term trajectory,” Bostic said. “High inflation undermines that.”

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

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