Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The markets are edgy this morning after the US Federal Reserve surprised investors by indicating that interest rates will rise from record lows sooner than expected, as the US recovery gather speed.
The Fed’s new projections, released after its latest policy meeting yesterday, indicate at least two rate increases are expected in 2023 – previously a majority of officials had seen them on hold near zero until 2024.
The Fed also began the process of “talking-about-talking-about” how it might end its bond-buying programme, a sign it is moving a little closer towards exiting its crisis-era stimulus measures.
This unexpectedly hawkish move knocked stocks on Wall Street last night, where the S&P 500 finished 0.5% lower.
The prospect of earlier interest rate rises has also driven the dollar up to a two-month high, and pushing the pound below $1.40 for the first time in over five weeks.
European markets are heading for a lower open too.
The Fed also raised its forecasts for growth this year to a blistering 7%, from 6.5% previously, but also expects higher inflation — 3.4%, up from 2.4% eyed back in March.
As we blogged last night, Fed chair Powell insisted that the central bank wouldn’t change course until it sees “substantial further progress” on employment and inflation.
“Lift-off is well into the future.
“We’re very far from maximum employment, for example, it’s a consideration for the future.”
He also argued that the jump in inflation in the US will be temporary, and expressed confidence about the prospects for growth, and job creation.
The Fed chair also highlighted that the pace of recovery in the labor market has been uneven, saying:
The economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been hardest hit.
But… he did also flag that inflation could turn out to be “higher and more persistent” than expected, saying the Fed would use its tools if necessary.
And Powell was also clear that the Fed will slow (or taper) its asset purchase stimulus package when the moment is right.
We will do what we can to avoid a market reaction, but ultimately when we achieve our macroeconomic goal we will taper, as appropriate.
Currently, the FOMC is buying $120bn per month of bonds with newly minted money.
Powell also tried to cool interest in the Fed’s rate predictions, or dot-plots, insisting that they weren’t a great forecaster (each official says where they think interest rates will be over the coming years)
Investors see last night’s meeting, and press conference, as a significant moment.
As Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors, explains:
“This time there was no denying it, the Federal Reserve took its first tentative steps on a more hawkish path. It was instantly felt in markets. While there was no immediate change in policy, the median projections for interest rates saw two hikes leap into the forecast for the end of 2023. Additionally, the talking about tapering finally began. However, Chair Powell suggested a start to tapering still remained a “ways off” as the FOMC continues to look for further progress in the economy.
The Fed’s economic forecasts shifted higher as it recognized that growth this year is going to be even stronger that it had already forecast. The 7% growth rate expected is now above economists’ consensus expectations, although forecasters are more optimistic about growth in 2022 than the US central bank. Elsewhere, the Fed’s forecasts now show a clear bias to above target inflation in the coming years. PCE inflation is forecast to be above target over the next 3 years.
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