The US Fed leans harder against inflation, taking risks

<p>Kia ora,</p><p>Welcome to Thursday’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 we now have a better idea of how the Americans are going to tackle their surging inflation problem.</p><p>The US Fed has <a href="https://www.federalreserve.gov/monetarypolicy/files/monetary20220615a1.pdf" target="_blank"><strong>raised its policy rate by +75 bps</strong></a> to 1.75% in a strong lean against their inflation threat. It is the largest increase by them since 1994. But it is not as strong as it could have been. They said they are "strongly committed to returning inflation to its 2 percent objective" which given that <a href="https://www.bls.gov/news.release/cpi.nr0.htm" target="_blank"><strong>inflation is 8.6%</strong></a> is now a long way off and will require a lot more than a 75 bps hike. So they have begun quantitative tightening on an unprecedented scale.</p><p>Their dot-plot (<a href="https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220615.pdf" target="_blank"><strong>p4</strong></a>) is now 3.5% for later this year, so another +175 bps of rises are likely coming over coming the coming four reviews in 2022, but then up only another 25 bps in 2023 before slipping back to 3.5% in 2024. The bottom line is that they themselves see a very high policy rate for the next two years plus.</p><p>They have also baked in an expectation that this will slow the expansion of the American economy and raise their jobless rate.</p><p>Meanwhile, <a href="https://www.census.gov/retail/marts/www/marts_current.pdf" target="_blank"><strong>American retail sales</strong></a> were up +8.1% from year-ago levels, but actually slipped marginally and unexpectedly in May from April. The near-term culprit is weak vehicle sales. The annual increase barely matches inflation.</p><p>US <a href="https://www.census.gov/mtis/www/data/pdf/mtis_current.pdf" target="_blank"