Daily Management Review

US Fed gets ready for high inflation


The US Federal Reserve (Fed) left its key rate at 0-0.25% p.a. at the end of the June meeting. The regulator also refrained from any changes to asset purchases, but pointed to lower pandemic-related risks due to the spread of vaccination.

© 2018 Advantus Media
© 2018 Advantus Media
The US Federal Open Market Committee again refrained from changing the key rate, which was urgently lowered to a range of 0-0.25% last March. While in March the dot plot with rate forecasts (updated every two months) did not suggest a hike until at least 2024, the committee now averages two rate hikes in 2023. The volume of asset purchases has not been changed either - it will remain at least $120 billion per month. The operations will continue until there is "substantial progress towards the goals of maximum employment and price stability". The asset purchases are helping to improve financial market functioning, it said in a statement following the meeting.

This time, the regulator replaced the phrase that "the pandemic poses significant risks" with a statement that vaccination has reduced the rate of spread of the virus.

The statement that "inflation has risen and this is mainly due to temporary factors" was retained. The inflation outlook was also changed from 2.4% in March to 3.4% in 2022 and from 2.4% in March to 3% in 2022 excluding energy and food prices. In 2022, the Fed expects both indicators to slow to 2.1%. Note that the annual inflation rate, on which the regulator is focusing, accelerated to 3.1% without food and energy in April (up to 3.6% with them).

The forecast for GDP growth this year was also improved from 6.5% to 7%. The previous adjustment was facilitated by the $1.9 trillion stimulus package, but now the US Congress is discussing an even larger increase in government spending.

Economic growth should be stimulated by a jobs creation plan aimed at upgrading infrastructure and a family support plan involving an increase in social spending.

Current statistics, however, remain mixed: US retail sales fell more than expected in May, while the producer price index and industrial production rose more than expected.

source: cnn.com