Fed's Daly: Real impact of Fed hikes likely bigger than what target rate implies
21.11.2022, 18:06

Fed's Daly: Real impact of Fed hikes likely bigger than what target rate implies

Reuters reports that San Francisco Federal Reserve President Mary Daly said on Monday the real-world impact of the U.S. central bank's interest rate hikes is likely greater than what its short-term rate target implies.

In prepared remarks for an address to the Orange County Business Council in California, Daly said some researchers have found "the level of financial tightening in the economy is much higher than what the (federal) funds rate tells us."

Key notes

Compared to the current target rate, she added, "financial markets are acting like it is around 6%."

Daly said "it will be important to remain conscious of this gap between the federal funds rate and the tightening in financial markets. Ignoring it raises the chances of tightening too much."

Daly said the next stage for the Fed will be "in many ways more difficult." She added that officials will need to be "mindful" of their choices and said "adjusting too little will leave inflation too high. 

"Although one month of data does not a victory make, the latest inflation report had some encouraging numbers, including a long-awaited decline in goods price inflation," she added.

Real-world impact of fed rate hikes likely higher than what current rate target implies.
Financial markets priced like fed funds rate at 6%, not 3.75%-4.00%.
Fed must be mindful of risk of tightening policy too much.
Fed has more work to do when it comes to rate hikes.
Fed policy is in modestly restrictive territory.

US dollar updated

The US Dollar, as measured by the DXY index, is up 0.85% at the time of writing. The index, which measures the US Dollar vs. a basket of currencies, is correcting a small portion of the November sell-off and is on track for a break above 108 the figure having made a high of 107.993 so far. 

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