The Federal Reserve has brought its current tightening cycle to an end, voting nine-one in favour of holding US interest rates at 5.25%.
“Readings on core inflation have been elevated in recent months, and the high levels of resource utilisation and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.
“Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”
Alan Wilde, director, fixed income and currency at Baring Asset Management, added: “Although this was no great surprise, and was justified by the recent data suggesting the economy is losing momentum, there was no reference in the statement to labour costs. These have shown worrying signs of rising sharply in terms of compensation across several different measures.
“We believe that this is the most likely reason why the Fed might resume tightening again later in the year. Meanwhile, by pointing out that inflation pressures will recede as the economy slows, the Fed is casting doubt on its own recent gross domestic product projections that had the economy growing around trend.
"To see inflation pressures subside to justify a pause would require growth to undershoot trend (and open the output gap again). This aspect may come under greater scrutiny by the markets in due course and lead to a steeper curve.
“Temporarily, at least the markets are inclined to believe the Fed that rates have risen sufficiently to slow the rate of growth and in so doing moderate inflation pressures. However, the next few months will test that stance as inflation readings are set to deteriorate further.”
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