WASHINGTON (Reuters) -The Federal Reserve is not targeting equity markets in its battle against inflation but that is “one of the avenues” where the impact of tighter monetary policy will be felt, Kansas City Fed president Esther George said Thursday in comments to CNBC.
“What we are looking for is the transmission of our policy through markets’ understanding that tightening should be expected,” George said a day after weak profits from major retailers contributed to a sell-off of stocks. “It is not aimed at the equity markets in particular but it is one of the avenues through which tighter financial conditions would emerge.”
Thursday was among the worst days for stocks since the onset of the pandemic, with major indices down 4% or more. Equity markets have been volatile since the start of the year as investors absorbed the implications of higher inflation and the rising interest rates that the Fed will use to fight it.
George said the volatility is not surprising as investors reevalute assets in light of the higher short-term interest rates that are set by the Fed and provide an important benchmark in pricing.
But while she said markets will be watched for information about the impact of Fed policy, she said the real test will be data on inflation. Along with reflecting financial conditions, stock values can influence household spending as individuals adjust to any loss of wealth or change their planning, easing demand for goods and services and, in theory, price pressures as well.
“Where I am focused on when ‘enough is enough’ is looking at our inflation target. Right now inflation is too high and we will have to make a series of rate adjustments,” said George.
It is too early, she said, to pinpoint how high rates might have to rise. Fed chair Jerome Powell said earlier this week the Fed would not hesitate to ratchet rates as high as needed to bring inflation from its current level of roughly 6% as measured by the personal consumption expenditures index, triple the Fed’s 2% target.
But she said she was comfortable with moving in half-point increments at upcoming Fed meetings, downplaying the idea that the Fed might shift to larger increments.
“We are good at 50 basis points right now and I would have to see something very different to say we need to go further than that,” George said.
(Reporting by Howard SchneiderEditing by Chizu Nomiyama)
