As expected, the US Federal Reserve has launched its tightening cycle, raising the funds target rate by 25 basis points to 0.25-0.50 percent. Interestingly, one Governor, James Bullard, dissented from with the decision, preferring a full 50 basis point rate hike.
Under Jerome Powell's Chairmanship, FOMC statements have become fairly lengthy, but today's is a model of concision, at just four paragraphs. This obviously reflects the extreme uncertainty that has been created by the Russian invasion of Ukraine. A brief opening paragraph recites the well-founded basis for tightening -- job gains, falling unemployment and rising inflation -- but then quickly moves on to the Ukraine invasion. In the Fed's view this is "likely to create additional upward pressure on inflation and weigh on economic activity."
The rest of the statement is pure boilerplate, with a brief reference to plans to start reducing the Fed's balance sheet "at a coming meeting". The key sentence is this: "With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong."
That is an admirable statement of confidence, but is it misplaced? It is hard to see how, in current circumstances, the Fed can use the monetary tools at its disposal to bring inflation all the way down from its current level, let alone the double-digit numbers that may well be seen in the next month or two, without severely crimping growth and the jobs market. The Fed was facing a tough balancing act this year even without Vlad the Invader's depredations in Ukraine; the job isn't getting any easier, but at least the Fed has finally made a start.
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