What action did the US federal reserve take in the June policy meeting?
The US Federal Reserve hit the pause button in its June policy, leaving interest rates unchanged in the 5-5.25 per cent range. The decision to hold rates comes after 10 hikes in a row — the rates were near zero in March 2022.
What are the indications about further rate hikes this year and the terminal rate of interest in the US?
In its policy statement, the Fed said by “pausing” it was giving itself time to assess how the economy was reacting to its efforts to ease the pace of price increases “with minimum damage” to the job market. Though inflation has fallen to 4 per cent in May, down from more than 9 per cent at its peak in June 2022, Jerome H Powell, the Fed chair, has said that the central bank remains committed to achieving the 2 per cent inflation target. The Fed has indicated that there could be two more hikes — lifting the policy rate to 5.6 per cent — before the end of 2023.
What is the Fed’s take on inflation in the US?
For the Fed, inflation control seems more of a priority now than boosting growth. The US economy grew 5.9 per cent in 2021 — the fastest rate in nearly four decades — as the easing of pandemic restrictions fuelled consumer spending. But the growth rate has fallen since, with the economy expanding at an annual rate of just 1.1 per cent in the first three months of this year. This is largely due to the Fed hiking rates rapidly to cool inflation and, in the process, weakening the demand in the economy
Which other large central banks met recently, what actions have they taken?
The People’s Bank of China (PBOC) lowered its short-term lending rate for the first time in 10 months on Tuesday. The central bank cut its seven-day reverse repo rate by 10 basis points to 1.90 per cent from 2 per cent.
In contrast, the ECB (European Central Bank) raised its policy rate by 25 basis points to 3.5 per cent — the highest level in 22 years. This is the eighth consecutive time the ECB has raised rates.
Bank of Japan, on the other hand, maintained its -0.1 per cent short-term interest rate target and a 0 per cent cap on the 10-year bond yield.
What appears to be the main driver behind these actions
China’s rate cut is clearly intended to give growth a boost. After the initial flurry of activity since the lifting of Covid restrictions early this year, China’s recovery has been waning. Low CPI inflation, which rose a mere 0.2 per cent in May from a year ago, suggest weakness in China’s domestic demand.
In the euro zone, the ECB’s rate hike action was prompted by concerns of underlying inflation pressure, which policymakers attribute to rising wages and companies pushing up prices. Though the annual rate of inflation has fallen from double digits late last year to 6.1 per cent in May, it is still way above the EU’s medium-term target of 2 per cent. ECB chief Christine Lagarde said a rate hike is highly likely again in July.
In Japan, despite stronger-than-expected inflation, the focus of the central bank is on supporting a fragile economic recovery. “Uncertainty regarding Japan’s economy is very high,” the BOJ said in a statement.
The contrasting decisions taken by major central banks in June indicate that, unlike earlier, Fed policy action hasn’t been the bellwether of interest rates. Domestic economic concerns and priorities appear to have largely dictated the rate-setting exercise.