The US Federal Reserve has indicated it could spend the rest of its 2022 schedule of six policy meeting lifting rates after it revealed a 0.25% increase in the federal funds rate at its two-day meeting in Washington that wound up early Thursday, Sydney time.
While the increase was widely forecast, the expectation for six increases over the rest of 2022 wasn’t.
The driver for the rise was still strong levels of inflation now at 40 year plus highs and set off by supply shortages, rising energy costs and to a small degree, higher wages.
The Fed’s previous interest rate forecast, issued in December, was for three rate hikes this year, three next year and one in 2024.
It’s new core inflation forecast for 2022 is up to 4.3%, from 2.6% in its December forecasts. The Fed also sees core inflation easing back to 2.7% next year and 2.3% in 2023 which are also above the December forecasts.
That’s a sign the Fed sees the need for a more aggressive rate rise policy to take the inflationary heat out of activity and with that growth.
So far as US economic growth is concerned, the Fed now sees 2.8% GDP growth in 2022, down from 4.0% in previous projections and well under the 5.7% actual real growth GDP figure for 2021.
The Fed chair acknowledged the big jump in inflation expectations from Fed officials, saying that “inflation is likely to take longer to return to our price-stability goal than previously expected.” Powell added that “participants continue to see risks as weighted to the upside” on inflation – a hint that the bank could, if it sees the need, turn a 0.25% rate rise at a forthcoming meeting into a 0.50% increase, according to US economists.
The new federal funds rate is 0.25% to 0.50%.
The Fed’s Open Market Committee the also pencilled in rate hikes at each of the six remaining meetings this year, pointing to a consensus funds rate of 1.9% by year’s end.
That is a full percentage point higher than indicated in December. The committee sees three more hikes in 2023 then none in 2024
The Fed had kept rates near zero since March 2020 when the first wave of the Covid pandemic hit hard, and the decision was its first increase since 2018.
“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,” the Fed said in its latest statement, noting that the committee “anticipates that ongoing increases in the target range will be appropriate.”
“The economy is very strong,” Jerome H. Powell, the Fed chair, said at a news conference following the announcement, calling recent growth “robust” and the outlook “solid,” noting that the labor market is “extremely tight.”
Russia’s invasion of Ukraine and related events is a “downside risk,” for the US economy he said, saying:
“The invasion of Ukraine by Russia is causing tremendous human and economic hardship,” it said. “The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”
The Fed’s quarterly economic projections, released alongside the rate decision, showed that officials expected inflation to hover around 4.3% at the end of 2022. While that is less than 6.1% jump in the 12 months to January, it is well above the Fed’s goal of 2%.
Wall Street was mixed and weakened after the Fed’s announcement and the prospect of six more rate rises this year – which would take the federal funds rate to 1.75% – 2.0% by the end of the year.
The Dow was down 1900 points an hour after the Fed statement’s release but in the last hour of trading, the market turned sharply higher and the Dow closed up 518 points or 1.5%, to 34,063.10. It swung within a 576-point range on the session.
The S&P 500 added 2.2% to 4,357.86, and the Nasdaq jumped 3.7% to 13,436.55 after the rebound in Chinese tech stocks and markets generally.
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That was after markets elsewhere had rallied strongly after Hong Kong’s Hang Sent index leapt nearly 10% and mainland Chinese markets were up 4% to 5% after a report on the official Xinhua news agency that the country’s state council vowed to keep its stock market stable, and to support overseas share listing.
The rise in Asian shares came a day after mainland China and Hong Kong share indexes had slumped in reaction to spiking coronavirus infections in China and fading expectations for a rate cut by the People’s Bank of China.
Chinese market volatility continued on Wednesday, with a strong early rebound in China’s CSI300 index evaporating by late morning. But turned around quickly higher after Vice Premier Liu He indicated China plans to take measures to boost the economy and would also announce policies favourable to capital markets.
But the statement from the Vice Premier and the Xinhua commentary provided no assurances on the main worry now about China – the surging number of Covid Omicron cases across much of the country and the lockdowns and other restrictions on major cities and regions.
Ports and transport hubs have been the focus of many of the restrictions, especially around Hong Kong and nearby Shenzhen and Guangdong.
If those restrictions continue into next week, some western economists believe Chinese economic activity such as retail sales, exports, imports and construction will feel the pinch.
Despite official media claims that the President Xi policy of zero tolerance ‘working, the state-owned Global Times newspaper reported two significant changes in policy which indicate the government has lost control of the outbreak and can’t follow the zero tolerance and elimination route.
The paper reported “China updated its COVID-19 playbook on Tuesday night, ordering COVID-19 patients with mild symptoms to go to centralized quarantine facilities instead of being hospitalized, and lowering the bar for patients to be discharged from hospital.
“Top epidemiologists hailed the adjustment as a “scientific and pragmatic” change that helps relieve pressure on the medical system as the country is facing the most severe outbreaks in two years, and they said that in no way can the adjustment be interpreted as the country “lying flat” facing the recent surge.
“The National Health Commission (NHC) updated the treatment playbook for COVID-19 on Tuesday based on the transmission characteristics of the virus’ variants, including Omicron and its strains, as well as the high proportion of mild cases. ”
More than 15,000 domestically transmitted positive cases recorded in half a month.
The outbreaks have affected 28 provincial-level localities, including Shenzhen in Guangdong Province, Shanghai and Jilin Province (still the worst hit region). It is the worst outbreak in two years and government efforts have been undermined by the short incubation period of 2 to three days and its rapid transmissibility which are hallmarks of Omicron and especially the new variant
The Global Times reported Weng Guang, former chief epidemiologist of the Chinese Center for Disease Control and Prevention (Chinese CDC) as saying the change in approach is an “important, scientific and pragmatic” adjustment of China’s approach to COVID-19 treatment and the optimized dynamic zero-COVID strategy.
“This relieves pressure on our medical system and is a push for a categorized treatment of COVID-19 patients,” Zeng told the Global Times, noting that he hopes similar optimized measures will be released in the future.”
That makes the change official and a major departure from the zero tolerance/elimination stance.
