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Summary
- The US Fed has raised the inflation expectations for this year.
- The central bank has brought forward the timeline for rate hikes.
- The Dow30 slipped in the red after the announcement.
Raising the estimates for the inflation this year, the US Federal Reserve has brought forward the timeline for rate hikes. In a clear shift from its earlier stance, the central bank now expects two rate hikes by 2023.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer‑term inflation expectations remain well anchored at 2%,” Federal Open Market Committee said after today’s meeting.
The US economy seems to have overheated in the recent past, as the 44% rise in the crude oil prices sent retail inflation in May soaring to the highest level in 13 years. Many analysts were anticipating moves to curb inflation by the central banks across the world. After the announcement by the Fed, the Dow Jones Industrial Average corrected by 77 bps to close at 34,033.67. Analysts expect the ripples of the Fed announcement to be felt across the globe.
In 2013, when Ben Bernanke (the then Fed Chair) hinted at doing away with the quantitative easing, it sent world markets on a wild goose chase. The phenomenon, known as Taper Tantrum, led to huge outflows of capital from the emerging markets. The outflow was, partially, responsible for the ouster of then Congress government in the world’s largest democracy – India.
The Fed, however, is discounting for the fact that the current bout of inflation may turn out to be even more than it estimates.
“As the reopening continues, shifts in demand can be large and rapid and bottlenecks, hiring difficulties and other constraints could continue to limit how quickly supply can adjust, raising the possibility that inflation could turn out to be higher and more persistent than we expect,” Fed Chairman Jerome Powell told reporters during the press conference after the meeting.
Even though the committee broached the topic of bond-buying programme, however, there were no indications of drawdown as yet. The bond-buying programme of Fed currently stands at US$120 billion each month.
