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.
Against the Fed’s current short-term target rate of between 3.75 percent and 4.00 percent , 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.” Compared to the current target rate, she added, “financial markets are acting like it is around 6 percent.”
Given that markets have priced in a monetary policy setting that’s well beyond what the Fed has imposed on the economy so far, 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.”…