Federal Reserve Keeps up Hawkish Stance Against Inflation
The Federal Reserve anticipates that higher interest rates will remain in place in the fight against sky-high inflation, according to the minutes just released of the central bank’s Federal Open Market Committee (FOMC) meeting in December.
The latest FOMC meeting minutes show that the “restrictive policy” of a tightening of monetary direction will have to be continued while inflation remains high. For any significant change of path on interest rate rises, there would have to be clear evidence that inflation was being pushed down towards the United States government target of 2%.
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In the summary of last month’s gathering it was revealed that due to the persistently high levels of inflation, many members of the FOMC warned that a loosening of monetary policy would prove to be counterproductive.
The FOMC decided to slow down the pace of rate escalation in December with an increase of 0.5% to 4.5%, after four successive 0.75% rises in interest rates.
Federal Reserve forecasts state that interest rates could climb up to just over 5% by the end of 2023.
Statistics recently revealed that annualized inflation had fallen for the fifth consecutive month down to 7.1%. It had also fallen by a substantial 0.6% from the data for November in month-on-month terms.
The instinctive hawkish approach of the Federal Reserve is more than likely to continue as its members are still showing a high level of concern about persistently elevated prices.
Market Reaction Positive to FOMC Minutes Release
The major United States stock markets reacted encouragingly to the details of the FOMC meeting being disclosed.
The S&P 500 Index finished higher trading at 3,852 following a rise of 0.75%, but it was still a volatile trading day and the index eventually finished below its session peak.
The Nasdaq 100 Index rose at a slightly slower pace of 0.48%, and the Dow Jones crept upwards with an increase of 0.40%.
Burns McKinney, the portfolio manager at NFJ Investment Group LLC in Dallas compared the current situation to a child who was asking for an ice cream treat.
“The parents say ‘no,’ but the market keeps asking because the parents have caved in the past. The market still thinks it’s going to get ice cream, just not as soon as they thought before.”
The US Dollar appreciated against the UK Pound by 0.26%, with the greenback buying £0.83.
Against the Japanese Yen the US Dollar also made gains, with the USD/JPY currency pair rising by 0.16%.
The Dollar did not perform so well against the Euro, as the US Dollar fell by 0.12% against that currency.
Overall, the recent US Dollar strengthening against the UK Pound and the Euro has appeared to run out of steam, following recent gains before the FOMC meeting minutes were unveiled.
Fed Tool Watch Changes After Minutes Release
The CME Group’s Fed Watch Tool, where market participants make their predictions over future rate rises, shifted after the FOMC meeting minutes release.
Before the minutes were released, just over 70% of respondents said that they believed that the next rate rise would again be at a slower pace of 0.25%.
More now believe that there will be a further 0.50% rise at the next FOMC meeting, as a smaller 64% now say that there will be a 0.25% rate increase.
The next Federal Reserve interest rate decision is scheduled for 31 January to 1 February.