Interest rate risks could become more bilateral

The Fed faces a dual risk of raising interest rates too much or too little, its No. 2 official said in a Friday morning speech amid a tumultuous time for global financial markets.

Driving the news: Global interest rates have soared and stock markets have plunged as investors react to concerted monetary tightening by the Fed and other central banks. In her new speech, Fed Vice Chair Lael Brainard stressed that the Fed will proceed both “deliberately and data-dependently” in its policy.

  • “We are committed to avoiding premature withdrawal,” Brainard told a conference at the New York Fed, according to a prepared text of his speech. But, she added, “we also recognize that the risks may become more two-sided at some point.”
  • Moreover, she said, “uncertainty is currently high and there is a range of estimates” about how interest rates will need to rise.

Between the lines: The speech does not suggest that the Fed reassess its rate hike plans amid the global market turmoil. But it is an acknowledgment of the risks of pushing interest rates too high and triggering a global recession that would rebound and further hurt the US economy.

  • The Fed finds itself in a delicate situation as inflation data from the United States continues to pour in – including a report on Friday morning that the Fed’s preferred inflation measure showed a rise of 4.9 % of consumer prices excluding food and energy over the past year.
  • The central bank aims to show its resolve as an inflation fighter to prevent high inflation from becoming too entrenched, but in the process it risks causing global distress by tightening the flow of dollars.

What they say : “When I think about the global crunch and the global economy,” San Francisco Fed President Mary Daly told reporters Thursday night. It looks at whether financial conditions have tightened more than expected given the Fed’s interest rate hikes.

  • “If that’s the case, then slowing the pace of increases, but still moving toward the right terminal rate, would be appropriate,” she said.

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