Esther George, president of the Kansas City Federal Reserve, has reiterated the Fed’s commitment to ameliorating inflation, suggesting that monetary policymakers are less concerned with the effect of rate hikes on equity values despite the recent sell-off in the stock market.
When asked by CNBC’s Steve Liesman about the recent bearish turn in the stock market, George remarked that such a downturn was a predictable consequence of the central bank’s policy of interest rate hikes.
“I think what we’re looking for is the transmission of our policy through the market’s understanding, and that tightening should be expected,” George said. “So it’s not aimed at the equity markets in particular, but I think it is one of the avenues through which tighter financial conditions will emerge.”
George’s remarks arrive on the back of a regimen of interest rate hikes, which the Federal Reserve began to impose in March, raising interest rates for the first time since 2018. This was followed by another rate hike earlier this month—by half a percentage point, the most severe rate hike in the past 22 years. These hikes are the Fed’s attempt to stymie inflation, which in recent months has reached levels not seen in over 40 years, as measured by recent reports of the Consumer Price Index.
However, such rate hikes often tend to have a deleterious effect on stock markets, which is in line with the direction Wall Street has taken since this more hawkish monetary policy was imposed. Since the beginning of the year, the tech-heavy Nasdaq has fallen by nearly 30 percent, with major losses in notable pandemic darlings such as Apple, Meta Platforms, and Netflix. Meanwhile, the broader S&P 500 is on the brink of a technical bear market (defined as a 20 percent downturn from its high).
Despite her concern about the current level of inflation, George has expressed confidence that the Fed will be able to return to the target 2 percent inflation rate by staying the course with rate hikes.
“I think we’ll succeed in bringing down inflation, because we have the tools to do the heavy lifting on that as it relates to demand, and we do see financial conditions beginning to tighten,” she said. “So I think that’s something we’ll have to watch carefully. It’s hard to know how much will be needed to make that happen given all the moving parts that we see in today’s economy.”
With equity markets in decline and the Federal Reserve seemingly intent on continuing its policy of rate hikes, speculation has begun to mount over whether such measures will result in a recession. However, for policymakers aligned with George, these measures are a necessary corrective to the recent bout of inflation. By so doing, they hope to stabilize the U.S. dollar, even if the cost may be a short-term economic downturn.