After 17 straight interest rate hikes, the US Fed decided overnight to
implement their much touted “pause” in monetary policy tightening,
leaving its funds rate target unchanged at 5.25 per cent. A large part
of the decision to leave the rate target unchanged seems to lie in the
Fed’s belief that the effects of policy are lagged, and that although
readings on core inflation continue to be elevated, there is enough
evidence that the moderation of economic growth is underway.

This was widely
expected but the accompanying statement cast doubt on the state of the real
economy and share prices fell by around 0.4 of one percent. US bond yields did not move but
Australia’s fell again – clearly
(Henry thinks) the RBA trusties are putting it around that rate hikes are over
here also. This is likely to be wrong, so take care, gentle

The central tenet
of the statement seems to be that the Fed has watered down their tightening
bias, keeping in mind that they do not want to hike too far and force the
economy into recession: “inflation pressures seem likely to moderate over time,
reflecting contained inflation expectations and the cumulative effects of
monetary policy actions and other factors restraining aggregate demand.”

However, the Fed
obviously wants to appear to remain vigilant on inflation, stating that “the
Committee judges that some inflation risks remain”, indicating that they are not
ruling out further tightening, although they stated that the timing of any
additional firming will be data dependant – leaving the markets to a lot of

Henry Thornton.

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Peter Fray
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