Fed Monetary Policy Report: Upside risks to the inflation outlook in the near term have increased

Upside risks to the inflation outlook in the near term have increased,” the US Federal Reserve (Fed) stated in its semi-annual Monetary Policy Report released on Friday.

Additional takeaways

More lasting but likely still temporary upward pressure on inflation has come from prices for goods experiencing supply chain bottlenecks.

Survey-based and market-based measures of longer-term inflation expectations have risen since the end of last year.

Inflation expectations in a range that is broadly consistent with longer-run inflation objective.

Fed institutions at the core of the financial system remain resilient.

Data for the second quarter suggest a further robust increase in demand.

Structural vulnerabilities persist at some types of money market funds and bank loan and bond mutual funds.

On Fed's asset purchase program, in coming meetings the committee will continue to assess the economy’s progress toward goals.

The post-pandemic labor market and the characteristics of maximum employment may well be different from those of early 2020.

Fed prepared to adjust stance of monetary policy as appropriate if risks emerge.

As extraordinary circumstances pass, supply and demand should move closer to balance, and inflation is widely expected to move down.

Spate of retirements spurred by the pandemic will continue to weigh on labor force participation for some time.

Recent readings on inflation expectations indicate inflation expected to return to levels consistent with the committee’s 2% longer-run inflation objective after a period of temporarily higher inflation.

No notable effect on treasury market functioning followed the expiration in march 2021 of temporary changes to the supplementary leverage ratio.

Fed's CIE index at levels 'likely more consistent' with fed's longer-term 2% inflation goal.

Most measures of hedge fund leverage are now above their historical averages.

Market reaction

The Fed report has little to no impact on the US dollar index, as it keeps its recovery mode intact around 92.30, as of writing.

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