Jakarta, CNBC Indonesia – The central bank of the United States (US) Federal Reserve System (Fed) significantly increased inflation expectations in 2021. The Fed even proposed a time frame for when to raise interest rates on Wednesday (16/6/2021).
In a meeting of the Federal Open Market Committee (FOMC), the Fed changed its stance by accelerating its plan to increase its benchmark interest rate. Having previously stated that he does not plan to do so before 2023 has passed, Jerome Paul has now indicated an increase in 2023 to two times.
Powell in his statement acknowledged that inflation could accelerate faster than the central bank’s previous expectations. The inflation target was also raised to 3.4% in 2021, up 100 percentage points from the March projection although he still considered the inflationary pressure to be “temporary”.
“As economies reopen, changes in demand can be large and rapid and trigger blockages, job creation difficulties and other constraints could continue to limit the speed at which supply adjusts, leading to the possibility that inflation could be higher and more persistent than we anticipated,” he said.
Markets reacted to the Fed news with tumbling stocks and higher government bond yields as investors anticipated Fed policy going forward, including the possibility that bond purchases would slow as quickly as this year.
Wall Street plunged at the close of trading Wednesday. The Dow Jones Industrial Average fell 265.7 points (+0.8%) to 34,033.67 after dropping to 382 points when Powell made a speech.
The S&P 500 index fell 0.5% to 4,223.7 following a fall in consumer stocks. Meanwhile, the Nasdaq fell 0.2% to 14,039.68 after dropping 1.2%.
“This is not what the market was expecting,” said James McCann, deputy chief economist at Aberdeen Standard Investments.
“The Fed is now signaling that interest rates need to rise faster and faster, with their forecast suggesting two hikes in 2023. This change in attitude is a bit surprising given the Fed’s recent claim that the recent spike in inflation is temporary.”
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