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Mester: Policy Not Yet Restrictive

FED
  • Mester (’22 voter) kept to typically hawkish comments in prepared remarks, noting the larger risk comes from tightening too little with policy needing to move into a restrictive stance and real short-term rates needing to move into positive territory and remaining there for some time.
  • Financial system: "We are likely to experience higher-than-normal levels of financial market volatility as well. At this point, indices constructed by the St. Louis Fed and the Kansas City Fed point to low levels of financial stress, but we will need to remain attentive to financial vulnerabilities"
  • Fed Funds have seen a firming in near-term rate expectations on the day at the expense of 2023 rates, with 75bp priced for the Nov 2 FOMC and a cumulative 128bp to an implied effective 4.36% for Dec’22. Then falls to a terminal 4.66% in Mar’23 (-3bp) and 4.36% for Dec’23 (-6.5bp), the latter coming further below that implied by the 4.6% median dot.

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