What’s Going On Here?The US Federal Reserve (Fed) said on Wednesday that it wouldn’t tweak its interest rates or economic support program, and it’s quite happy doing nothing – but only until 2023. What Does This Mean?It came as no surprise that the Fed didn’t change its short-term policies, even if US inflation has been at record highs for a couple of months. The central bank, after all, thinks this is just a blip: inflation rates compare recent prices to those from the year before, so of course they’re going to look high next to last year’s pandemic-battered environment. And since the Fed reckons things will go back to normal of their own accord, it’s in no hurry to slow those price rises down by hiking interest rates. Besides, its other key measure of US economic health – employment – suggests now’s not the time to withdraw economic support: the country’s still around 7.6 million jobs short of where it was before the pandemic arrived. Why Should I Care?For you personally: Watch out for the signs.
There are a couple of other indicators you can use to stay one step ahead of central bank decisions. First, bond yields, which rise if investors think inflation is high enough to force up interest rates. Second, wages: higher wages suggest, all else equal, consumers have more cash to spend, which might then push prices higher. At the moment, neither of those measures are showing much sign of an uptick – but by 2023, the Fed reckons, some of them might, which is sooner than most investors expected.
The bigger picture: The UK looks at the bigger picture.
As for the UK, fresh data out on Wednesday showed inflation in May came in much higher than expected – up 2.1% from the same time last year, compared to economists’ predicted 1.8%. But no one actually seemed to mind: that 2.1% is only slightly higher than the UK central bank’s long-running target, and it’s not exactly the 5% the US is wrestling with. | 