MACRO: The Fed sees upside risks to the inflation in the near term

The Federal Reserve has released its semi-annual Monetary Policy Report. The document has 75 pages and addresses monetary policy and economic developments. Investors were focused on many crucial factors like the labour market recovery or elevated inflation - things that may impact the Fed’s future decisions. Below we present some key quotes from the report (full report may obviously be found on the Fed’s website).

Inflation:

• More lasting but likely still temporary upward pressure on inflation has come from prices for goods experiencing supply chain bottlenecks, such as motor vehicles and appliances. In addition, prices for some services, such as airfares and lodging, have moved up sharply in recent months toward more normal levels as demand has recovered. Both survey-based and market-based measures of longer-term inflation expectations have risen since the end of last year, largely reversing the downward drift in those measures in recent years, and are in a range that is broadly consistent with the FOMC’s longer-run inflation objective.

• Inflation is expected to return to levels broadly consistent with the FOMC’s 2 percent longer-run inflation objective after a period of temporarily higher inflation.

• Upside risks to the inflation outlook in the near term have increased

Labour market:

• Although labor market improvement has been rapid, the unemployment rate remained elevated in June, and labor force participation has not moved up from the low rates that have prevailed for much of the past year. A surge in labor demand that has outpaced the recovery in labor supply has resulted in a jump in job vacancies and a step-up in wage gains in recent months.

• The labor force participation rate (LFPR) has improved very little since early in the recovery and remains well below pre-pandemic levels.

• Factors likely contributing both to the incomplete recovery of the LFPR and to differences across groups include a surge in retirements, increased caregiving responsibilities, and individuals’ fear of contracting COVID-19;

• Expansions to the availability, duration, and level of unemployment insurance benefits may also have supported individuals who withdrew from the labor force. 

Economic activity:

• Data for the second quarter suggest a further robust increase in demand. Against a backdrop of elevated household savings, accommodative financial conditions, ongoing fiscal support, and the reopening of the economy, the strength in household spending has persisted, reflecting continued strong spending on durable goods and solid progress toward more normal levels of spending on services.

Monetary policy:

• In coming meetings, the Committee will continue to assess the economy’s progress toward these goals since the Committee adopted its asset purchase guidance last December.

• The Committee is prepared to adjust the stance of monetary policy as appropriate if risks emerge.