The US Federal Reserve’s unprecedented tightening of monetary policy may have slowed the inflation momentum, but an economist has warned that the Fed needs to “keep the pedal to the metal”.

The latest edition of Economic Insights from the Swiss Re Institute says the threat posed by inflation is nowhere near over yet.

There are indications, the publication assures, that “US financial conditions are as loose” as they were when the Fed started hiking interest rates in March.

Economic Insights is self-described as providing timely analysis of macro developments and market events in the global economy, and their implications for the re/insurance industry.

The analysis is by Patrick Saner, CFA, a senior global economist and investment strategist and head of macro strategy at Swiss Re.

He said that despite the 225 basis points of interest-rate rises since March, and although inflation momentum in the US may at last be decelerating, the threat is far from over.

More is needed to bring inflation under control for the medium and longer term.

The economist argues: “The Fed needs to retain a tight policy to ensure that longer-lasting inflation concerns are addressed for good.

“Whilst this is the Fed's communicated intention, financial markets are expecting interest-rate cuts in the second half of next year.

“Financial conditions are driven by many key financial variables, such as interest and mortgage rates, corporate bond spreads, equity levels and exchange rates.

“Such indices provide clues as to how adequate the monetary policy setting is. By some of these measures, financial conditions are at roughly the loosest levels since the Fed first hiked interest rates in March, and many financial conditions indices are looser than during the peak of the Fed's last hiking cycle in 2018, when core inflation was running at below 2.5 per cent and the labour market was not as tight as it is today.

“In our view, such financial conditions are inconsistent with the existing and considerable inflation pressures in the US economy.

“In fact, since financial conditions started easing again in July, the price of a broad commodity basket has increased by about 10 per cent while longer-term inflation expectations have also perked up.

“In other words, easing financial conditions in the current environment become self-defeating as they reinforce, instead of hinder, inflation pressure.”