- Ahead of the U.S. inflation print for June, Federal Reserve Bank of Kansas City President Esther George warned that a rushed pace in policy tightening could do more harm than good.
- Against this backdrop, it’s no wonder that the Fed can only make policy on the fly and that is contributing significantly to both market and business volatility.
With the macro picture as uncertain as ever, policymakers at the U.S. Federal Reserve are becoming increasingly divided over the magnitude and efficacy of rate hikes to rein in the fastest pace of inflation in over four decades.
Ahead of the U.S. inflation print for June, Federal Reserve Bank of Kansas City President Esther George warned that a rushed pace in policy tightening could do more harm than good.
In a speech to the Mid-America Labor and Management Conference in Missouri, George suggested “communicating the path for interest rates is likely far more consequential than the speed with which we get there” adding that raising rates “too fast” would heighten the risk of “oversteering.”
George stood out as the only dovish dissent in June’s 75-basis-point Fed rate hike and the Reserve Bank of Kansas City’s President was concerned that increasing rates rapidly risks tightening faster than the “economy and markets can adjust.”
While many policymakers have publicly expressed a further hike of 0.75% at the Federal Open Market Committee meeting later this month, George prefers a 50-point hike instead and investors appear to be betting on that.
Despite no shortage of rhetoric from policymakers of another hawkish outcome at the end of this month’s Fed rate-setting meeting, traders have priced in an estimated 3.4% for interest rates in the first half of next year, well beneath the central bank’s own plot.
The Federal Funds Rate currently sits between 1.5% to 1.75% with estimates of rates ending this year between 2.5% to 2.75%.
George argued that there was considerable uncertainty surrounding the correlation between the speed of the Fed’s actions, and their impact on the real economy suggesting it was imperative to “observe how the economy is adapting to changes in monetary policy.”
In contrast, U.S. Federal Reserve Chairman Jerome Powell once noted that there is no lag in the effect of monetary policy as economic stakeholders respond instantaneously to forward guidance, noting that businesses anticipating higher borrowing costs in the future, don’t necessarily wait till it happens before making provision.
But the Fed hasn’t been able to give clear forward guidance and much of that has to do with the fact that nobody knows what the outlook for the next several quarters is, let along the next several years.
With the Russian invasion of Ukraine dragging on, key agricultural and industrial commodities are being withheld from global markets and sending the price of basic necessities soaring globally.
Risk aversion is seeing the greenback soar to its highest level in years and companies are scaling back hiring, expansion and plans for public offerings, even as inflation remains stubbornly elevated.
Against this backdrop, it’s no wonder that the Fed can only make policy on the fly and that is contributing significantly to both market and business volatility.
Investors looking to some form of respite will need to hope that the inflation print starts to moderate and then come down significantly over the next few months to at least warrant a pause in policy tightening by the Fed in September.