Fed officials stare at market volatility, say inflation remains key focus

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WASHINGTON, Sept. 26 (Reuters) – US Federal Reserve officials on Monday curbed increasing volatility in global markets, from slumping US stocks to currency turbulence abroad, saying their priority remained to contain domestic inflation.

Asked at an event in the Washington Post whether he thought US investors were overly optimistic about Fed policy until a recent sharp sell-off kicked in, Atlanta Fed president Raphael Bostic said it was irrelevant.

“I don’t know if they are too optimistic or not optimistic enough… The main thing is that we need to get inflation under control,” Bostic said. “Until that happens, I think we’re going to see a lot of volatility in the market in all directions.” This also applied to the recent upheaval in the United Kingdom. Tax cuts proposed by the government of new British Prime Minister Liz Truss, with their potential to fuel inflation further, have raised prospects that the country’s fiscal policy will run counter to the Bank of England’s efforts to tame price increases. with higher interest rates. read more

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The mixed signals have sent the pound into a tailspin, adding another dose of volatility to global financial markets already coping with the Federal Reserve’s rate hikes coming in faster and higher than expected.

“We are deeply concerned about the response to the proposed plan,” Bostic said. “The key question will be what this means for the eventual weakening of the European economy, which is an important consideration for how the US economy will perform.”

In separate comments to the Greater Boston Chamber of Commerce, Susan Collins, the chairman of the Boston Fed, reiterated the Fed’s consensus that the battle to cool the current inflation wave was paramount.

“Inflation remains too high at the moment,” Collins said in her first policy remarks since she became head of the bank.

Although she said she felt the pace of price increases could be at or just about to peak, “to get inflation back on target, credit conditions will need to be tightened further,” which the Fed is influencing through increases in the target federal fund rate.

The Fed maintains an inflation target of 2% as measured by the consumer spending price index. As of July, that index rose by more than 6% year-on-year. The figures for August will be announced on Friday.

The US central bank approved a third consecutive three-quarters percentage point rate hike last week. It has now raised its key rate by a total of three percentage points this year, which is one of its faster-ever efforts to raise borrowing costs and slow the economy.

In recent weeks, in commenting on the policy and in their actions at Fed meetings, Fed officials have been adamant that they will push interest rates as far as it takes to cool inflation — even at the cost of rising unemployment and a possible recession.

Some sectors of the economy have already taken the hit, with home loan mortgages doubling to more than 6%.

In recent weeks, stock markets have reflected a broader price revision against the possibility of US interest rates returning to levels not seen in a decade and staying there.

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

Fed officials have often been accused of coddled financial markets, but have provided little indication that the current sell-off will cause them to rethink their policy plans as long as prices and wages continue to rise and the labor market remains strong.

“The US economy functions best when there is confidence about… the short- and medium-term trajectory,” Bostic said. “High inflation undermines that.”

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Reporting by Howard Schneider; Editing by Paul Simao and Nick Zieminski

Our Standards: The Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the US Federal Reserve, monetary policy and economics, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economic reporter and on the Washington Post local staff.

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