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The US Federal Reserve lowered its inflation outlook for the next year, by 0.3 percentage points to a median 6.3%, from the record high in March, but warned of decreased liquidity in financial markets.
The Fed mentioned in its Financial Stability Report, that consumers grew a little more optimistic about inflation in April, though they still expect to be spending considerably more in the year ahead.
On a three-year basis, inflation expectations rose 0.2 percentage points to 3.9%, which itself is 0.3 percentage points off the record.
Decreased liquidity
According to the Fed’s Financial Stability Report, high inflation and monetary tightening, along with the ongoing war in Ukraine would deteriorate the liquidity conditions across key financial markets.
“Elevated inflation and rising rates in the United States could negatively affect domestic economic activity, asset prices, credit quality, and financial conditions more generally,” the report said
The central bank announced its plans to shrink its $9 trillion asset portfolio starting next month in to reduce inflation that has grown at the fastest pace since January 1982.
Federal Reserve Governor Lael Brainard said in the statement accompanying the report, “Households and businesses have decreased their borrowing as a percentage of gross domestic product (GDP), and currently appear to have resources to cover debt burdens, which is an important aspect of resilience in an environment of rising interest rates.”
“The Federal Reserve is working with domestic and international regulators to better understand the exposures of commodity market participants and their linkages with the core financial system,” she added.
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Source: Federal Reserve