Fed policy: The Federal Reserve may on Wednesday have missed its last chance to signal the possibility of a rate rise this year — or at least any time soon. Gold, oil, the dollar and many price data suggest the Fed’s ultra-low rates and benign view of inflation are behind the curve. It could be very tough to catch up later.
The Federal Open Market Committee’s statement said that the Fed's current program of Treasury bond-buying would come to an end as planned in June. In Fed Chairman Ben Bernanke’s first press conference following a monetary policy release, he reiterated that the Fed viewed its stock of bonds as the main influence on bond market conditions, not the flow of its purchases. By that logic an end to Fed buying would be neutral, not a policy tightening move. Whether markets share Bernanke's interpretation will become clearer in July.
The Fed boss also indicated that the FOMC’s repeated statement that ultra-low interest rates would last for “an extended period” meant “a couple of FOMC meetings.” If that language is finally removed after the June 21-22 meeting, the earliest interest rate hike would come following the September 20 powwow. But with June marking the end of bond-buying, the Fed might not want to change something else significant as well, so any prospect of interest rate rises could easily shift into the fourth quarter or next year.
The Fed seems sanguine about this because it continues to believe that inflation is subdued. But the personal consumption expenditure deflator, one of the Fed’s preferred metrics, rose by 0.4 per cent in February and has risen at an annual rate of 2.7 per cent over the last six months. The Fed has increased its own inflation projections, but building price pressures could outstrip them quickly.
Oil and gold prices both rose following the FOMC statement, while the dollar declined further — all arguably indicative of inflation concerns. The Fed can point to bond yields and medium-term inflation expectations as showing no such worry. But the central bank's focus on slow-moving, medium-term indicators makes its absorption of new information delayed. Fed officials secretly might not mind a little more inflation. But monetary policy is an imperfect instrument, and if it waits too long the Fed risks losing control of markets altogether.
