To The Moon

• Bullard says markets have ‘digested’ message on rate hikes
• Mester says rates are ‘still not even in restricted territory’

Federal Reserve officials reiterated Thursday that they will keep raising interest rates to restrain high inflation, and that markets are now understanding the message.

“If you look at the dots, it does look like the committee is expecting a fair amount of additional moves this year,” St. Louis Fed President James Bullard told a virtual emerging-market forum, referring to the bank’s so-called dot plot of projections. “I think that that was digested by markets and does seem to be the right interpretation.”

Cleveland Fed chief Loretta Mester repeated that officials are resolute in their quest to increase rates to a level seen as restrictive.

“Real interest rates -- judged by the expectations over the next year of inflation -- have to be in positive territory and held there for a time,” she said earlier in an interview on CNBC. “We’re still not even in restricted territory on the funds rate.”

Fed officials raised interest rates by 75 basis points on Sept. 21 for the third straight meeting, bringing the target for the benchmark federal funds rate to a range of 3% to 3.25%.

Their quarterly Summary of Economic Projections, or dot plot, shows a median forecast of rates reaching 4.4% by the end of this year, implying a further 1.25 percentage points of tightening over their remaining two meetings in November and December.

Mester said her forecast is probably a bit above the median path because she sees inflation being persistent, based on her conversations with businesses, community development groups and other sources.

“In my SEP I have inflation coming down, but we have to bring interest rates up to get that downward shift in inflation,” she said, adding that the US economy has so far been able to handle the higher interest rates.

UK Turmoil

She drew a distinction between US markets and what is happening in the UK, where the Bank of England announced Wednesday that it would launch unlimited bond buying to address market dysfunction. When the Fed announced its bond purchases in the early months of the pandemic, it did so at a time when it was also lowering rates to support the economy, she said.

The BOE faces some communication issues because it is lifting rates but needed to purchase assets, which is typically viewed as a method for easing monetary policy, in order to support financial stability, Mester said.

“It’s a challenging situation for them,” Mester said. “For financial stability reasons and for market functioning reasons they had to go in and buy bonds.”

“Market functioning is incredibly important because you won’t be able to hit any monetary policy goals if the markets aren’t functioning,” she said. “That’s different than worrying about volatility in the markets.” Mester said that so far, there had been no sign of dysfunction in US financial markets.