Fed Interest Rate Decision Sparks Inflation Concerns

The US Federal Reserve kept its interest rate on hold at its meeting yesterday in a decision that saw a split on the central bank's interest-rate setting body, with a nine to three vote.

The three dissenters wanted an increase in line with movements in the bond market, which indicate financial markets expect inflation to increase over coming months. The yield on the 30-year Treasury bond rose by 0.11 percentage points to 5.22 percent, its highest level since 2007, and the yield on the 10-year Treasury bonds, which forms the base determinant for mortgage rates and corporate borrowing, rose by 0.07 percentage points to close at 4.67 percent.

Société Générale's Subadra Rajappa said: 'The market is concerned that the Fed not hiking is going to result in persistently higher inflation.'

The concern in the financial markets is that if inflation expectations become 'de-anchored' and workers expect price hikes will continually indefinitely, this will fuel wage demands and they will break out of the constraints imposed on them by the trade union bureaucracy.