Higher inflation, lower growth - and higher taxes

<p>Kia ora,</p><p>Welcome to Wednesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.</p><p>I'm David Chaston and this is the International edition from Interest.co.nz.</p><p>Today we lead with news that higher inflation, lower growth and higher taxes lead the trends today.</p><p>At his Congressional confirmation hearing, Fed chairman Powell <a href="https://www.federalreserve.gov/newsevents/testimony/powell20220111a.htm" target="_blank"><strong>said</strong></a> inflationary pressures will last well into the middle of 2022 and they are addressing the problem by planning to raise interest rates and end asset purchases this year while a balance-sheet contraction could perhaps start later in 2022. He was hawkish on rate rises to get inflation back to the target level and prevent it from becoming entrenched. The Fed <a href="https://www.federalreserve.gov/monetarypolicy/files/monetary20211215a1.pdf" target="_blank"><strong>announced</strong></a> at its December meeting it would end its pandemic-era bond purchases in March, paving the way for three interest rate hikes by the end of 2022. But <a href="https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20211215.pdf" target="_blank"><strong>FOMC minutes</strong></a> released later showed a more hawkish Fed, and the central bank signaled it may become warranted to increase the federal funds rate sooner or at a faster pace than previously anticipated.</p><p>Markets haven't really reacted to the testimony, deeming the comments as confirmation of what they have priced in.</p><p>US <a href="https://tradingeconomics.com/united-states/redbook-index" target="_blank"><strong>retail sales in early January</strong></a> maintained a strong year-on-year expansion but the pace was a lot lower than pre-Christmas. </p><p>There was a <a href="https://www.treasurydirect.gov/instit/annceresult/press/preanre/2022/R_20220111_1.pdf" target="_blank"><strong>US Treasury bond tender today</strong></a> for their 3 year bond. It was we