More rate hikes likely by Fed, says economist Barry Eichengreen, pointing to risks for banks, markets

“I think there can be more than one or even two additional rate hikes. The minutes that we received yesterday indicated that the majority of FOMC members see the pause as a one-time thing. Core inflation is still hovering around 5 percent. So I would expect to see them continue to tighten unless there is bad news on the growth front.”

Eichengreen expressed concerns about the potential risks to banks and financial markets as the Federal Reserve continues to raise rates. He acknowledged that some banks may face balance sheet risks as a result of these rate hikes.

“What the Fed tells us is that they have other instruments, instruments other than interest rates that they can do to ensure that financial stability risks remains contained. So I do not think that danger of accidents in the financial system will deter them from continuing to fight inflation.”

Furthermore, Eichengreen warned that there is a risk of the problems in banks and financial markets spilling over into the real economy later in the year. He mentioned that various sectors, including commercial and residential real estate, are already beginning to feel the effects of higher interest rates.

Contrary to the notion that stock markets would remain immune indefinitely, he suggested that equity markets could be impacted by these developments as well.

However, Eichengreen emphasised that the Federal Reserve has the flexibility to change its course if necessary. While he expects the Fed to continue tightening monetary policy due to persistent inflation, he acknowledged that if circumstances change, the Fed would adjust its view and rates could be reduced.