Federal Reserve policy makers seem to be linked to financial markets in terms of risks.
Yields on government bonds have risen steadily and are pushing through mortgage rates, but Fed officials are still seeing more disinflation risks, at least according to the January meeting of the Federal Open Market Committee released last week.
“Participants generally felt that the risks to the inflation outlook had become more balanced than was the case for most of 2020, although most still considered the risks to be the weighted downside,” the minutes of the January 26-27 meeting said..
If anything, policy makers expected rapid price increases to be spotty due to supply constraints from the COVID-19 pandemic. They are not worried about it.
“Many participants emphasized the importance of distinguishing between such one-off changes in relative prices and changes in the underlying inflation trend, noting that changes in relative prices could temporarily raise measured inflation but were unlikely to have a lasting effect.”
The FOMC meeting was more than three weeks ago, and perhaps the thoughts of the committee members have evolved. But even then, decision-makers expected a fiscal stimulus of $ 1.9 trillion, and the outlook did not seem to worry them.
Disconnect the setting between the ECB and Fed policy
It is also the beginning of a link between the Fed and monetary policy in the euro area. The January 20-21 meeting of the Governing Council of the European Central Bank showed decision-makers who were true about inflation, noting that it was likely to turn positive in January after months of decline while still subdued.
But the protocol also contained a warning:
“It was emphasized that the medium-term inflation outlook was surrounded by a high level of uncertainty, given the unprecedented pandemic situation and long-standing questions about changes in the underlying factors of inflation.”
Data published long after the ECB meeting proved to be booming in January, with a price jump of 0.9% compared to consensus expectations of only 0.5%. Much of the profit was attributed to one-off factors, and economists expect that the rate of increase will slow down in the coming months.
In January, the Government Council believed that inflation dynamics could change with a recovery in activity during the second half of the year, and “the point was made” that a temporary increase should not be missed for a sustained increase. But the Council is clearly alert to risks and the surprising increase in January will make hawks like Bundesbank President Jens Weidmann even more cautious.
On the other side of the Atlantic, however, Boston Fed Chairman Eric Rosengren, also a hawk, remains relaxed about inflation prospects. Continuing with the Fed’s thanks to inflation, Rosengren said in an online symposium that he expects some sectors to show price jumps.
Then he added:
“But what we really want for inflation is that broad inflation is at a sustained level of 2%. I do not think we will see it this year. I would be surprised if we see it before the end of next year. ”
St. Fed President James Bullard earlier this week said the US economic outlook is good and inflation is likely to rise this year. Politicians would take such an increase “on board”, he said, without showing too much concern.
At the same time, the return on the Treasury note benchmark on Friday rose to 1.34%, almost 20 points higher than at the end of the previous week. Interest rates on 30-year fixed-term mortgages also rose nearly 20bps from a low of 2.8% earlier this month to push up to 3.0%.
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