Fed officials stare down volatile markets, say inflation remains top focus

Some sectors of the economy have felt the hit already, with mortgages on home loans doubling to more than 6 per cent. PHOTO: AFP

WASHINGTON - US Federal Reserve officials on Monday sloughed off rising volatility in global markets, from slumping US stocks to currency turbulence abroad, and said their priority remained controlling domestic inflation.

"There are interactions there," Cleveland Fed president Loretta Mester said, noting that financial market volatility can affect investor decisions and the value of the US dollar does impact the US economy.

"But in terms of our goals, we are going to set our policy, taking into account the environment we are in, in order to get back to price stability here in the US," Ms Mester said after a hawkish speech at the Massachusetts Institute of Technology in which she argued that it could be more costly to do too little to rein in inflation than to do too much.

Asked at a Washington Post event whether he felt US investors had taken an overly optimistic view of Fed policy until a recent sharp sell-off began, Atlanta Fed president Raphael Bostic said that was beside the point.

"I don't know whether they are too optimistic or not optimistic enough... The more important thing is that we need to get inflation under control," Mr Bostic said. "Until that happens, we are going to see... a lot of volatility in the marketplace in all directions."

Tax cuts proposed by the government of new British Prime Minister Liz Truss, with their potential to further stoke inflation, raised the prospect that the country's fiscal policy will conflict with efforts by the Bank of England to tame price increases with higher interest rates.

The mixed signals have sent the pound into a tailspin, adding another dose of volatility to world financial markets already coping with Fed interest rate increases moving faster and higher than anticipated, with many other countries racing to follow suit.

The reaction to the proposed plan is "a real concern", showing increased uncertainty about Britain's economic prospects, Mr Bostic said. "The key question will be what does this mean for ultimately weakening the European economy, which is an important consideration for how the US economy is going to perform."

The United States central bank last week approved a third consecutive 75-basis point rate hike, lifting its policy rate by a total of 3 percentage points this year in what has been one of its fastest efforts ever to raise borrowing costs and slow the economy.

In recent weeks, Fed officials have been adamant that they will push rates as far as needed to cool inflation - even at the cost of rising unemployment and a possible recession.

Some sectors of the economy have felt the hit already, with mortgages on home loans doubling to more than 6 per cent, and home sales dropping.

Ms Mester was asked repeatedly about the housing market, and even whether the Fed had perhaps already gone far enough, but she stuck to her guns.

This is going to "be painful" and unemployment will rise, she said, but to bring down inflation, "we are just going to have to move rates up and rates are going to be held higher for longer than we thought previously".

She said she would want to see several months of month-to-month inflation declines before being convinced that inflation had peaked.

The Fed maintains a 2 per cent inflation target, as measured by the personal consumption expenditures price index. As at July, the index was increasing at a more than 6 per cent annual rate. Data for August will be released on Friday.

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

The S&P 500 is down 12 per cent just in the month that Fed chair Jerome Powell delivered a stern message about the economic pain required to curb the fastest price increases since the 1980s.

Fed officials have often been accused of coddling 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 soaring, and the job market remains strong.

"The US economy functions best when there is confidence about... its trajectory over the short and medium terms. High inflation undermines that," Mr Bostic said. REUTERS

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