WASHINGTON (Reuters) – Events in the United Kingdom, with new government fiscal plans triggering a rapid sell-off in the British pound, reflect rising uncertainty about the direction of the country’s economy and could lead to greater economic stress in Europe and the United States, Atlanta Fed President Raphael Bostic said on Monday.
“The reaction to the proposed plan is a real concern and a fear that the new actions will add uncertainty to the economy,” Bostic said in a webcast interview with the Washington Post. “The key question will be what does this mean for ultimately weakening the European economy, which is an important consideration for how the U.S. economy is going to perform.”
“These are just proposals, and we haven’t actually seen what’s going to play out,” Bostic said.
Tax cuts proposed by the government of new British Prime Minister Liz Truss, with their potential to further stoke inflation, raised the prospect that the country’s fiscal policy will conflict with efforts by the Bank of England to tame price increases with higher interest rates. [L1N30X0A4]
The mixed signals have sent the pound into a tailspin, adding another dose of volatility to world financial markets already coping with Federal Reserve interest rate increases moving faster and higher than anticipated.
The U.S. central bank last week approved a third consecutive rate hike of three-quarters of a percentage point. It has now raised its policy rate a total of three percentage points this year, marking one of its faster efforts ever to raise borrowing costs and slow the economy.
Bostic, the first Fed official to address the events in Britain, gave no indication the Fed might respond in any way.
Rather, he said, the U.S. central bank’s focus will remain fixed on controlling inflation in the United States. The volatility seen recently in U.S. equity markets, as well as in currency markets from Britain to Japan, may well continue until that has happened.
“The more important thing is that we need to get inflation under control,” Bostic said. “Until that happens, we’re going to see I think a lot of volatility in the marketplace in all directions.”
(Reporting by Howard Schneider; Editing by Paul Simao)
