The Financial Times

Wednesday’s statement by the Federal Reserve does not say that the US central bank now sees the risks to inflation as greater than the risks to growth – but it makes clear the balance of risks has moved in this direction.

It suggests Fed officials think the next move in US interest rates will very likely be up. But it leaves open the question of how soon and how quickly they will move.

This reflects the high level of uncertainty over the economy – with cross-currents from oil, housing and the financial sector. The statement does not suggest rate rises are likely in the next few months, but the Fed has kept that option open.

In effect, it serves notice that it is concerned about inflation, and could switch to a more aggressive rate-tightening mode if the inflation outlook and inflation expectations worsen.

That stance bridged some differences on the Fed’s Open Market Committee. The number of dissents fell from two to one – Richard Fisher, the Dallas Fed president. This suggests that while many regional Fed chiefs are anxious about inflation, this does not necessarily translate into a view that rates should rise soon.

As the statement makes clear, monetary policy is no longer dominated by the need to manage the “tail risk” possibility of a very severe recession. Instead, the debate is about the interest rate that is appropriate for a sub-par economy facing fierce headwinds to growth, but with a serious inflation risk from record oil prices and their potential effect on inflation expectations.

The Fed marked up its description of current growth, saying the economy “continues to expand, partly reflecting some firming in household spending”. But “tight credit conditions, the ongoing housing contraction and the rise in energy prices” will continue to weigh on growth. Growth risks have diminished, but not vanished.

By contrast the Fed now sees inflation expectations on some indicators as “elevated” – though not rising. It no longer cites all the reasons it thinks inflation should decline from here. It simply said the committee “expects inflation to moderate”, but thinks the “upside risks to inflation and inflation expectations have increased” amid “continued increases in [energy prices]”.

The balance of risks could still swing back towards growth – particularly if oil prices stop rising or fall. But a reasonable guess at this juncture might be that the Fed would hope to raise rates later this year, but only once or possibly twice – assuming the economy and financial sector gradually strengthen, and inflation expectations do not force tougher action.

That would be a less dramatic reversal than some in the markets are hoping for, but a more rapid turnaround than the Fed has practised in the past.