Fed policymakers press ahead with inflation fight, even with markets in turmoil

Federal Reserve policymakers will press ahead with raising U.S. borrowing costs to fight the corroding effects of too-high inflation, taking in stride both turmoil in global financial markets and early signs their actions are weakening the job market.

“I’m quite comfortable” with raising interest rates to 4-4.5 percent this year and 4.5 -5 percent next year, San Francisco Fed President Mary Daly told reporters after a speech at Boise State University on Thursday, adding she expects that rates will need to stay at that level for all of 2023.

Those ranges encompass what the majority of Daly’s fellow policymakers wrote in their rate path projections published last week, when the Fed lifted interest rates to 3-3.25 percent in what is proving to be the most aggressive round of rate hikes since the 1980s.

The Fed’s steeper-than-expected policy tightening, aimed at bringing down inflation that’s running at more than triple the Fed’s 2 percent target, is expected to slow economic growth and lift unemployment. Global stock markets have tumbled, and major currencies have lost ground against the dollar.

Loretta Mester, president of the Cleveland Fed, speaking on CNBC on Thursday, offered an even more aggressive outlook on what is needed to tame inflation.

Mester said she does not see a case for slowing rate hikes right now, and in fact said she expects the central bank will need to go even further than it signaled last week.

“I probably am a little bit above that median path because I see more persistence in the inflation process,” Mester said.

Daly addressed the turmoil in financial markets, noting that markets are “trying to get their footing,” with investors assessing a myriad of risks, including market dysfunction in the U.K. which prompted intervention by the Bank of England, the war in Ukraine, the damaged gas pipeline in the Baltic Sea, continued COVID lockdowns in China, and policy tightening by many central banks globally.

“What I ultimately want to know is how much have financial conditions tightened, what has this done to the global economy, how much of a headwind will that be blowing against U.S. growth, and then how does that factor in to where what we need to do in our policy,” Daly said.

And while Daly sees some signs that U.S. labor markets are slowing – noting that firms she talks to say they are recruiting new hires with less intensity — consumer spending remains robust.

Still, Daly said she does not believe the Fed will need to raise rates so high they will trigger a deep recession — for now. Unemployment, at 3.7 percent, is low, and the labor market is still strong, she said.

But if households and businesses start expecting inflation to continue to get worse, or if supply chains don’t heal as expected and goods shortages continue to push upward on prices, Daly told reporters, “then I am prepared to do more.”

Mester said she did not see distress in U.S. financial markets that would alter the central bank’s campaign to lower very high levels of inflation through interest rate hikes.

While “no one knows for sure” if there is a big problem lurking in the financial sector right now, “so far, we haven’t seen the kind of market dysfunction, even through what’s happening in the global markets right now, we haven’t seen that in the U.S. markets,” Mester said.

Earlier Thursday, St. Louis Federal Reserve President James Bullard said he doesn’t see U.K. market turmoil “really impinging on the U.S. inflation or real growth developments.”

Tax cuts proposed by the government of new British Prime Minister Liz Truss touched off a drop in the value of the pound to an all-time low of $1.0327 on Monday. The drop reflects widespread fears the government’s plan will further stoke inflation and put Britain’s fiscal and monetary policy at odds with each other.