MacroscopeReal-world limits will keep Fed interest rate rises moderate, and the markets know it

The spike in US inflation has seen the Fed turn hawkish, but do not expect a return to the all-out campaign against rising prices of the Volcker years

In Hong Kong, where CPI is way below the US inflation rate, but whose monetary policy must track the US’, this approach will suit it just fine

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Shelves that held ham products are partially empty at a grocery store in Fairfax, Virginia, on January 13. Supply chain disruptions have helped to drive up inflation in the US. Photo: AFP

Published: 3:30am, 19 Jan 2022Updated: 4:24am, 19 Jan 2022

US monetary policy is set to tighten with inflation now at a level not seen since the 1980s. And Federal Reserve actions will affect Hongkongers, given the Hong Kong dollar’s peg to the US dollar via the Linked Exchange Rate System.

But real-world considerations may limit how far Fed tightening can go. That might suit Hong Kong, where consumer price inflation is currently well below that of the US.

A 0.25 percentage point rise in US interest rates may well now occur in March, with further incremental hikes to follow, but this certainly won’t be a rerun of then Fed chair Paul Volcker’s 1980s all-out campaign against rising prices – even if, as the Fed’s Lael Brainard said last week, controlling US inflation is now the central bank’s “most important task”.

Brainard’s comments came after data revealed that the headline US consumer price index hit 7 per cent year on year in December, the highest since June 1982. In contrast, overall CPI in Hong Kong increased by an annualised 1.8 per cent in November, according to the latest figures from the Census and Statistics Department.

People walk through a flower market in Hong Kong’s Prince Edward area on January 16. According to census data, Hong Kong’s consumer price index rose by an annualised 1.8 per cent in November. Photo: AFP

Fed policymakers, who only recently held that US inflation pressures were “transitory”, are now flagging the need for multiple interest rate hikes this year and are being transformed from monetary policy doves into sharp-taloned hawks.