Wednesday 07 July 2021 12:49 pm | Updated: Wednesday 07 July 2021 12:50 pm

Investors set to scrutinise Fed’s mettle amid inflation surge

Almost a fifth of US dollars were created this year — The Fed will meet again in early May for its next interest rates decision

Investors will be looking for any signs of the Federal Reserve wobbling on its ultra-loose monetary policy stance as inflation surges in the US when minutes from its latest FOMC meeting are published today.

Last month, the Fed was bullish on the inflation outlook, reiterating that price rises are purely transitory and will ease once global supply chains are restored to pre-pandemic capacity.

The central bank reached this conclusion despite predicting inflation could grow to 3.4 per cent this year, higher than its previous estimates. The current rate of inflation in the US rose at its fastest pace since 2008.

The Fed also announced that it expects to enact the first-rate hikes in 2023, much early than it initially expected.

Chairman Jay Powell moved to quash growing negative sentiment among investors after the sooner than expected rate rises were announced, which has partly helped cool markets.

Yesterday, yields on 10-year US treasuries dropped to their lowest level in four months, indicating demand for US government is still strong.

However, a string of economic data shows inflation is surging quickly in the core supply side of the economy, fuelling concerns that price rises could creep into consumer goods.

Oil prices – along with other key commodities and raw materials – have been soaring, raising concerns that higher costs could curtail supply as firms pull production until it becomes more financially viable. This is causing shortages for many goods and services, prompting firms to compete with one and another to secure products, which is putting strong upward pressure on prices.

Cost pressures in the production of raw materials is beginning to bleed into the services sector of the US economy.

Input costs climbed at the second-fastest pace on record in June among US services firms, according to the latest PMI from IHS Markit. Firms are already acting to protect their margins, passing higher costs to consumers at the second-steepest rate on record in June.

This trend is being mirrored across Europe, suggesting that inflationary pressures could be imported from some of the US’s largest trade partners. Similar rises are being recorded in China.

Severe labour shortages are plaguing many sections of the US economy, driven by a mixture of workers being fearful they may catch a deadly strain of Covid, poor availability of childcare provision and generous unemployment benefits.

As a result, firms are offering staff higher wages to incentivise them to take on jobs, which is eating into their earnings further and may prompt them to continue to pass on extra costs.

So, inflationary pressures are spreading into many pockets of the US economy.

Investors will be combing through today’s minutes to see how much the Fed really believes that this all transitory.