Dominique Dwor-Frecaut, a former associate with the New York Fed, says the Fed needs to hike the fed-funds rate to 8% to stabilize inflation.
Dominique Dwor-Frecaut, a former associate with the New York Fed and outlier from the rest of the financial-market pack, is standing by a bold call she made a year ago: She says the Federal Reserve needs to hike its benchmark interest rate to 8% from the current level of 4.5%-4.75% to stabilize inflation, and could still get there. The U.S. hasn’t seen an 8% fed-funds rate since July-October 1990 — when inflation as measured by the annual headline consumer-price index hovered between 4.8% and 6.
Financial markets are finally coming around to the Fed’s message of ongoing rate increases, as bond investors factor in additional hikes for this year. Treasury yields have followed the trajectory of rate expectations and trended higher. Meanwhile, global bonds — which move in the opposite direction of yields — are in the process of erasing all of the gains they’ve made this year, based on the Bloomberg Global-Aggregate Total Return Index.
Dwor-Frecaut’s reasoning boils down to three key points: that the U.S. is caught in a high inflation regime in which “wages and prices have become entangled, just as in the 1970s and 1980s”; monetary policy remains “too loose”; and the Fed could fall further behind the curve, given the long time it takes for rate increases to filter through the economy.
In relying on the Taylor Rule, she said that “I tried to find something as simple as possible and not impacted by technical issues. What struck me is that if you looked at the fed-funds rate and Taylor Rule since the 1970s, the story again, again and again is that the Fed starts tightening when the gap between the Taylor Rule and actual fed-funds rate is wide, and stops when it has closed.”
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