MNI: Fed Needs Measured Rate Hikes As Economy Slips-OECD

The Fed needs to keep hiking interest rates but the pace must be measured against tighter global markets and the Ukraine war's impact on supply chains, the OECD said, striking a less hawkish tone than FOMC officials.

“The persistence and broadening of inflationary pressures mean that further increases in the federal funds fate are necessary," through early 2023, according the annual review of the U.S. economy published Wednesday. "Nonetheless, considerable flexibility is warranted.”

The Paris-based OECD also predicted a more severe U.S. economic slowdown than the IMF or the Fed, calling for GDP growth of just 0.5% next year. Unemployment is also seen rising next year to 4.3% from 3.7% and core inflation exceeding 3% through 2023.

"Risks and uncertainties are larger than usual and tilted to the downside. Inflation may prove surprisingly persistent, prompting more aggressive tightening of monetary policy by the Federal Reserve," the OECD said. Another Covid variant could also further weaken economic growth, the report said.

There's little sign Fed officials will stop raising rates despite financial disruptions caused in part by its aggressive tightening, even as they keep a close eye on market function and possible contagion from volatility in UK gilts. (See: MNI INSIGHT: Fed Sees Fin. Stability As Separate From Rates)

Fiscal policy has been appropriately scaled back as the pandemic eases and inflation must be tamed, the OECD said. Governments should still consider targeted measures and longer-term policies to help a shrinking middle class and address climate change, the report said.