Market Speaks: US Monetary Policy Will Be Restrictive For Some Time To Ensure That Inflation Moves Back To Target

11 Oct 2022 , 11:55 AM

The U.S. Federal Reserve Vice Chair Lael Brainard has stated that the path and pace of Fed interest rate increases will remain data-dependent as the central bank monitors the economy and the evolution of domestic and global risks. Brainard said market expectations for the level of the policy rate at the end of the year are now more than twice as high as they were just seven months ago. As a result of the significant increase in interest rates and associated tightening in broader financial conditions, the second-half rebound will be limited, and that real GDP growth will be essentially flat this year. The moderation in demand due to monetary policy tightening is only partly realized so far. The transmission of tighter policy is most evident in highly interest-sensitive sectors like housing, where mortgage rates have more than doubled year to date and house price appreciation has fallen sharply over recent months and is on track to soon be flat. In other sectors, lags in transmission mean that policy actions to date will have their full effect on activity in coming quarters, and the effect on price setting may take longer. The moderation in demand should be reinforced by the concurrent rapid global tightening of monetary policy. Monetary policy will be restrictive for some time to ensure that inflation moves back to target over time. It will take time for the cumulative effect of tighter monetary policy to work through the economy broadly and to bring inflation down. In light of elevated global economic and financial uncertainty, moving forward deliberately and in a data-dependent manner will enable us to learn how economic activity, employment, and inflation are adjusting to cumulative tightening in order to inform our assessments of the path of the policy rate.Powered by Commodity Insights