FX.co ★ Fed will no longer raise rates in anticipation of inflation

On Wednesday, the Federal Open Markets Committee said it would keep the base rate on short-term loans at the same level, and will continue its program of purchasing assets worth at least $ 120 billion a month.

However, even if inflation remains low, investors fear that if conditions change, the Fed may suddenly begin to reduce purchases.

Nonetheless, Fed officials remain cautious about the economy, especially since people with high incomes are doing well, while those below, service workers for instance, are doing rather poorly. This discrepancy has largely served as an incentive for the Fed's flexible average inflation targeting regime.

According to this approach, the Fed will no longer raise rates in anticipation of inflation. Instead, it will put up with its growth. In the past, when the unemployment rate fell, the Fed has taken preventive hikes to stem inflation.

Currently, the US economy is showing conflicting signs of inflation: the cost of housing and materials is rising, while inflation in services is lower.

In terms of macroeconomics, the economy grew at a high rate in the fourth quarter of 2020, although activity slowed towards the end of the year. On Thursday, the US Department of Commerce will release full report on US 4th quarter GDP, the forecast of which is 4.3% growth, as expected by the majority of economists polled by Dow Jones. Then, on Friday, data on inflation will be published, and it is expected to increase by 1.3% year-on-year.

Investors are puzzled with the Fed's statements that they are not going to stop inflation. In the long term, the rate of inflation, as measured by Treasury securities, has already exceeded 2%. The Fed, in turn, has begun laying the groundwork for ignoring the expected price spikes brought by higher economic activity.

"The rebound in market-based inflation-offsetting measures will not alarm the Fed," said Paul Ashworth, chief economist at Capital Economics. "Instead, Fed officials are more likely to see this increase as a confirmation of the changes they have made to the policy framework."