The US Federal Reserve has increased rates to 0.50 per cent for the first time since 2018 on the back of the invasion of Ukraine by Russia and related events, which are likely to create additional upward pressure on inflation.
“Indicators of economic activity and employment have continued to strengthen,” the Fed said in a statement.
“Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
The Fed has two goals to achieve maximum employment and inflation at the rate of 2 per cent over the longer run.
“With appropriate firming in the stance of monetary policy, the committee expects inflation to return to its 2 percent objective and the labour market to remain strong,” the Fed said.
The central bank also confirmed it would begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.
Commenting on the Fed’s highly anticipated move, GSFM investment strategist Stephen Miller applauded the central bank’s new “dot plot”, which, he said, better aligns with prevailing market expectations of the pace of policy rate increases.
The newly issued Fed “dot plot” revealed that 12 of 16 officials see at least six policy rate increases this year.
The central tendency now has a policy rate of 1.9 per cent by end 2022 and 2.3 per cent by end 2023, compared with 0.9 per cent and 1.6 per cent back in December and just 0.3 per cent and 1.0 per cent back in September.
Commenting on the Fed’s renewed focus on inflationary pressures, Mr Miller said it “may be a case of better late than never”.
US inflation as measured by the February consumer price index (CPI) was at its highest level since 1982, yet for much of 2021, the Fed maintained a narrative centred on “transitory” price pressures.
Mr Miller believes the re-emergence of inflation is nor purely hinged on energy and other commodity prices in the wake of the Russia-Ukraine conflict and supply chain blockages, but that partial blame rests on the excessively accommodative monetary policy.
“Developed country central banks everywhere persisted with historically high levels of monetary accommodation even after it was clear that the economic dislocation wrought by the pandemic was not as great as initially feared,” he explained.
Reflecting on the market reaction to the inflation-fighting Fed, Mr Miller said it was a long way short of the “tantrum” that followed former Fed chair Ben Bernanke’s “taper” announcement back in May 2013.
“Markets initially reacted sharply to the Fed announcement with bond yields up and yield curve flattening with more pronounced increases in front-end yields,” he said.
“Perhaps in a nod to the Fed’s renewed inflation-fighting credentials, ‘break-even’ inflation rates also fell, and equities gave up intra-day gains.
“A number of those moves reversed after the press conference from chairman [Jerome] Powell with equities closing strongly on the day as chairman Powell pointed to what he saw as the reliance of the economy to policy rate increases.”
