Fed: Real impact of Fed hikes likely to be larger than target rate implies — Mary Daly

Reuters reports that the president of the San Francisco Federal Reserve, Mary Daly, said on Monday that the real-world impact of the US central bank’s rate hikes is likely larger than its short-term rate target implies.

In remarks prepared for a speech before the Orange County Business Council in California, Daly said that some researchers have found that “the level of financial tightening in the economy is much greater than what the (federal) funds rate tells us.” “.

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Compared to the current target rate, he added, “financial markets are acting like it’s around 6%.”

Daly said that “it will be important to remain aware of this gap between the federal funds rate and financial markets tightening. Ignoring it increases the chances of over-tightening.”

Daly said the next stage for the Fed will be “in many ways more difficult.” He added that officials will have to be “conscious” of their decisions, saying that “adjusting too little will leave inflation too high.”

“While a month of data doesn’t make a win, the latest inflation report had some encouraging numbers, including a long-awaited decline in goods price inflation,” he added.

The real-world impact of the Fed’s rate hikes is likely to be larger than the current rate target implies.
Financial markets price the federal funds rate at 6%, not 3.75%-4.00%.
The Fed must be aware of the risk of tightening policy too much.
The Fed has more work to do when it comes to rate hikes.
Fed policy is in modestly tight territory.

US dollar update

The US dollar, as measured by the DXY index, is up 0.85% at the time of writing. The index, which measures the dollar against a basket of currencies, is correcting a small part of the November sell-off and is on track to break above 108, having peaked at 107,993 so far.