The acceleration of inflation in the United States, which reached a 13-year maximum in May, and in some metrics reached records since the days of Ronald Reagan, forced the Federal Reserve officials to change their tone.
Following the meeting on Wednesday, the Fed left the key rate range (0-0.25% per annum) unchanged, but for the first time since the beginning of the crisis, it increased rates on operations in the money market.
Reverse repo of the Federal Reserve Bank of New York, allowing banks to “park” excess dollar cash, from June 17 will be carried out at 0.05% per annum (against 0% previously).
The rate that the FRS pays on the reserves placed in its accounts will also increase by 0.05 percentage points, to 0.15% per annum.
At the same time, the mood of the voting members of the Open Markets Committee has sharply changed, follows from the block of macroeconomic projections published by the Fed.
If in March only four out of 18 were in favor of raising the key rate next year, then at the June meeting there were already seven of them.
In the forecasts for 2023, the majority (13 people) are already in favor of raising rates, whereas three months ago there were seven of them.
The Fed’s forecast for the key rate for 2023 is now 0.6%, which means at least two steps up. At the same time, five votes in the FOMC were given for three or four increases (up to 0.75-1% or 1-1.25%).
“Inflation may turn out to be higher and more stable than we expect,” said the head of the Federal Reserve Jerome Powell, commenting on the results of the meeting.
“As the economy continues to open up, demand surges can be large and rapid, and supply disruptions, hiring difficulties and other issues can continue to limit the rate at which supply adapts,” he explained.
The Fed sharply raised its inflation forecast for the current year – 2.4% to 3.4% and slightly for the next two – to 2.1% and 2.2% (versus 2% and 2.1% at the March meeting).
The key issue for the market remains the quantitative easing program, under which the Fed pumped $ 3.5 trillion into the markets and continues to buy back assets at a rate of $ 120 billion a month.
These operations will continue, the American regulator announced in a release: monthly the balance of the Federal Reserve will be replenished with Treasury bonds for $ 80 billion and mortgage bonds – for $ 40 billion.
Nonetheless, the beginning of QE’s winding down is already beginning to be carefully discussed. Powell said at the meeting, Fed officials “talked about starting to talk” about ending the buyout program. He added that the market will be warned in advance of any changes in “quantitative easing”.
“There has been a significant shift in the way the Fed views inflation risks,” said Mark Cabana, strategist at Bank of America.
In June, the growth rate of consumer prices in the United States reached 5% in annual terms – the highest since 2008. Core inflation, excluding energy and food, hit a record since 1992 (3.8%), while commodity price increases of 6.8% were unprecedented in 39 years.
Although the Fed continues to publicly claim that the price spike is temporary, it looks like the regulator “sees the threat of higher inflation, which is likely reflected” in the key rate forecast, he explains.
The dollar reacted to the meeting with a record increase since March 2020. The dollar index, which reflects the rate against six key world currencies, rose 0.93% and renewed its maximum since the end of April – 91.36 points.
The ruble on the Moscow Exchange, weakening after the talks between Vladimir Putin and Joe Biden, accelerated the fall. By 23.40 Moscow time, the dollar rate with the calculation of tomorrow increased by 0.64%, to 72.64 rubles, and earlier reached 72.71 rubles – a weekly maximum.