Federal Reserve officials are pushing back on investors' mounting concerns that the U.S. central bank's aggressive campaign to counter high inflation is setting the stage for a market crack-up.
Central bankers' confidence is countered by wide-ranging fears among market participants who see bond market liquidity strains, damaging asset price declines as well as a range of problems in markets abroad. Some see this landscape as dire enough to call for the Fed to slow or even consider stopping its interest rate increases, something officials have so far shown no appetite for as they contend with the worst inflation surge in 40 years.
So far, Fed liquidity tools have shown no signs of market distress. Foreign central banks have not tapped a tool that lends dollars in any notable size, and other lending facilities have yet to see any unusual activity. A measure of market stress produced by the St. Louis Fed suggests financial stress is"Global markets are increasingly showing signs of instability," said Roberto Perli, head of global policy research at Piper Sandler. "The most prominent example is the U.K.
The index has climbed from neutral to current levels in 10 months. That took five years in the Fed's last rate-hike cycle. Financial markets expect the Fed to raise the rate again by three-quarters of a percentage point at its next policy meeting in November. More rate rises are very likely after that, with central bankers penciling in a 4.6% federal funds rate by some point in 2023.
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