Fed has become hawkish in inflation battle, says Cleveland Fed report

According to a report released by the Cleveland Fed on Thursday, the central bank has become hawkish in its inflation battle, as a result of a move by the Federal Reserve into the level called for by commonly followed monetary policy rules.

According to the bank's quarterly estimate of where the key central bank rate should be based on seven different rules, the Fed's short-term rate target should be at 3.52% in the final quarter of the year. This estimate is under the current federal funds rate setting of 3.75% to 4%.

The Fed is almost certain to raise its target rate range at the Dec. 13 -- 14 Federal Open Market Committee meeting, and then again in 2023. Some Fed officials have said the target should rise to around 5% by next year.

The rules used in the Cleveland Fed report give a suggested setting for monetary policy based on different factors, such as inflation and economic activity. These rules are based on the work of Stanford University professor John Taylor and have been tweaked by academics over the years.

While they are paying attention to rules, monetary policy can't run on autopilot, and that judgment is key, according to Fed officials. The Fed does not use a rule officially, but they look at these benchmarks to determine whether monetary policy has been set properly.

The current rate rise campaign is aimed at getting monetary policy to levels that would restrict growth, according to policymakers. The funds rate is already over where rules suggest it should be and is heading higher gives a window into how hawkish central bank policy is at present.

The Cleveland Fed report said policy rules say the federal funds rate should be at 4.08% in the final quarter of next year and 4.29% in the fourth quarter of 2024. Monetary policy is likely to be tighter than those settings, at least for next year.

The central bank is engaged in a historically aggressive campaign to raise rates, as officials try to lower the highest inflation seen in 40 years.

The Fed has been dogged by criticism that it started raising rates too late, and until now, the level of funds rate has not been under what was suggested by the rules. In September, the suggested funds rate for the third quarter was 3.67%. After the September policy meeting of the Fed in September, the funds rate was 3% and 3.25%.