Washington Watch: Fed rate hikes likely not fully priced into financial markets, IMF official says

United States

Financial markets haven’t grasped how high the Federal Reserve may have to raise interest rates to get inflation under control, a top IMF official said Tuesday.

“Interest rates ultimately might end up at pretty high levels once we’re done [with] the tightening cycle. I’m not sure it’s fully priced in yet,” said Tobias Adrian, the director of the IMF’s Monetary and Capital Markets division, in an interview with MarketWatch.

“We have seen a tremendous steepening in the yield curve, but I think there could be more to come,” he said.

With consumer inflation running at an 8.5% rate, the Fed will have to tighten more and other central banks will follow, Adrian noted. Higher rates will hit consumer demand which will slow down inflation.

“That’s never pretty, if you slow down economic activity,” Adrain said.

The IMF is not forecasting a recession in the U.S., but it could certainly happen, Adrian said.

Financial conditions have tightened notably this year, the IMF said in its semi-annual report on global financial stability. Such a sharp rise in interest rates could expose heavily leveraged countries and financial firms.

So far, some relatively poor countries in sub-Saharan African and the Middle East are in crisis. The debt of 15-18 countries is trading in distressed levels.

In addition, there have been pockets of the commodities market as prices went through the roof.

Some analysts are calling for more government oversight of the commodities markets.

Read: Commodity prices are going haywire, prompting worries

“So far so good, but the sector is fairly opaque,” Adrian said.