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Fed’s Daly says financial markets are acting like interest rates are much higher than they actually are


Financial markets conditions seem much tighter than suggested by the actual level of the Federal Reserve’s benchmark interest rate, said San Francisco Fed President Mary Daly.

Citing new research from the her regional bank, Daly said Monday that tightness in markets is more akin to a benchmark rate of around 6%. That is well above the actual level of 3.75%-4% level that Daly said should only be “modestly” slowing the economy down.

Markets appear to be feeling an impact from the shrinking of the Fed’s balance sheet, or quantitative tightening. In addition, the market is paying attention to the central bank’s forward guidance about the need for higher rates, Daly said, in a speech to the Orange County Business Council.

The Fed said earlier this month that it will keep raising rates until the level is “sufficiently” slowing the economy down in order to lower the high inflation rate.

Fed officials are debating what that level may be. Daly has said her most recent estimate would put the Fed’s benchmark rate around 5%.

St. Louis Fed President James Bullard said the rate could be in the range of 5%-7%.

Opinion: What Bullard got wrong about a 7% fed funds rate?

The research could add to the argument that the Fed might not have to raise rates much higher.

Daly said ignoring the actual impact of Fed rate policy on the economy would raise the chances of overtightening — leading to a recession.

“As we make decisions about further rate adjustments, 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.

Stocks
DJIA,
+0.04%

SPX,
-0.31%

turned higher in early afternoon trade on Monday. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.820%

slipped to 3.82%.



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