Fed holds the course amid rising inflation concerns

Look’s like the US Federal Reserve is “looking through” the blip in inflation figures in the US and has remained very accomodative overnight in its latest statement and subsequent press conference with no talking of tapering.

The USD dropped against most of the majors on the release, but stocks were non-plussed and barely moved. At the post release press conference, Fed Chair Powell reiterated the notion that the labor market in the US still has a lot of slack, post COVID. He noted especially about “scaring” the labor market and small businesses and that the recent blip higher in inflation is because of base effects, not something “materially substantial”. Hmm…

Some small upgrades to economic growth, no change in QE (keep printing chaps!) and there it is.

Here’s the official statement from the Fed:

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.

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Comments

  1. And there you have it folks, for years everyone has been wondering if we are all turning Japanese and now we have finally made it; zero rates as far as the eye can see, inflation just over the horizon, the reserve bank printing and buying everything while blowing out its balance sheet, soaring government debt, always in budget deficits and a currency not even worth the pixels on a screen.

    • Except that inflation in Japan has been low over the last quarter century and counting – in fact the lowest in the world. The rest of the world would have to be lucky to achieve that.

      • SupperannuationMEMBER

        I had a friend who lives in Japan for 10 years. During that time a can of coke went from 400 yen to 150 yen.

    • Jumping jack flash

      “…the reserve bank printing and buying everything while blowing out its balance sheet…”

      Oh, if only they were printing. Printing would actually be inflationary. No, they’re conjuring up debt, very cheap debt, but debt nonetheless – the only thing they can create as a bank, and debt is never free.

      • It’s actually the velocity of money that creates inflation, not the money supply. You could double the money supply tomorrow and if no one makes transactions with it you will have no inflation. This is why digital currency with expirations is so interesting.

        • Yes, and the velocity also depends on the confidence people have in a fiat. As soon as people lose the confidence, there will be a rush to the exit and the velocity will shoot up to infinity – everyone will try to get rid of it in exchange for something more real as soon as they own it. And just like that, the journey to a failed state will be complete.

          A failed currency is a hallmark of a failed state. So one can judge if a state has failed or not by looking at its currency. Whether a currency has failed or not can be objectively measured by how many people actually want to own it. Nobody wants to own a failed currency, including the citizens of the issuer of the failed currency.

  2. Jumping jack flash

    “Look’s like the US Federal Reserve is “looking through” the blip in inflation figures in the US and has remained very accomodative overnight in its latest statement and subsequent press conference with no talking of tapering.”

    Indeed!

    Isn’t that strange?

    And here we are still promoting policies from the “dark ages” of the New Economy – back in those early days when nobody really understood the system they created and we actually did have CPI and wage inflation – which astoundingly are to suppress CPI and wage inflation!

    It is truly absurd and points to major failings in the mental capacity of our leadership to understand the current environment and the basics of their duties, but apart from that I can only imagine it is because everyone still thinks the RBA will panic at the first sign of inflation and raise rates.

    Not going to happen!

    • Oh, the leadership understands it well, I think.

      Inflating away the outstanding debt is politically the easiest way to “manage” the otherwise unmanageable debt. A combination of juggling the composition of the CPI basket and “looking through” some occasional outliers that they may fail to remove from the basket in a timely manner, the goal *looks* most certainly achievable.

      • Jumping jack flash

        Yes! Its so simple. So why are they having so much trouble doing it?

        Is it greedy businesses getting in the way? It certainly seemed to be the case with the Jobkeeper money. It is a travesty that the money wasn’t all used up and given to the workers like it should have been, and then to throw salt in the wound, [some] businesses are paying back the money! Can you believe it!?

        But why is this so?
        Is it simply stupidity on all counts?
        Is it not enough communication of the agenda to the various players?
        Is it not enough regulation around how businesses use “aid” and “stimulus”?

        Maybe business owners misinterpreted JOBkeeper as free money as payment to graciously keep the positions available, rather than money to hand to their workers so they wouldn’t need to stump it up themselves?

        • Well, it is certainly possible and in fact quite easy to induce inflation – just ask Zimbabwe. It is just that you don’t exactly want to lose control of this inflating away the debt exercise and induce hyperinflation. That will make you (central bank) look bad. Once the CPI rises 10% YOY, it will be hello Zimbabwe without any realistic prospect of turning back, so you may want to be a bit cautious.

          Still, it looks fairly easy. You just need to hire one of these economists once in a while who will be routinely “surprised” at the apparent lack of inflation in front of a TV camera for as long as the exercise remains under control. If you screw things up somewhere down the road and have to meet Mr. Zimbabwe, all you will need to do is to shrug and say, well, this rising inflation is so sudden after remaining benign for so long that nobody could have seen this coming!!

  3. Looked at the input costs for a business in the USA rescently- everything has gone up a lot .And then you have the cost of transport both domestic and international that have gone up significantly
    Thus the cost of the product has risen considerably and people are willing to pay
    So where is the extra money to pay coming from .Is it money they would otherwise spent on travel?Dont think wages have risen that much to pay for all this inflation
    I think these price rises will be difficult to reverse and at some point wages will have to rise- so can you really look through this shit.Is there really deflation next?Surely we are at an early stage of an inflationary cycle

    • Jumping jack flash

      Stimulus. A trillion here, a trillion there. Eventually they’ll find the correct amount of stimulus that will do the trick.

      Perhaps the US is succeeding in pulling off the plan? I hope they do. Australia looks like it failed dismally.

      The plan is to use unprecedented amounts of stimulus to kickstart CPI which will then filter through to wage inflation (they hope).
      If businesses can charge more, then they should be able to pay more, but no business will ever trim profits to pay their workers more! Business owners will never cut their pay to pay their workers more. Business owners are people too, and people have debt. Their wages are already allocated to debt.

      So as you correctly point out, how can businesses charge more for their products when nobody is paid enough to consume right now? Well the answer is stimulus, and LOTS of it. COVID provides the perfect justification.