Federal Reserve maintains interest rates and signals stimulus withdrawal soon – monetary policy

The US Federal Reserve, led by Jerome Powell (pictured), kept the key interest rate in a range between 0% and 0.25%, as expected.

In addition, it also decided to maintain the current pace of asset purchases, equivalent to 120 billion US dollars per month. These amounts are divided each month into $80 billion in Treasuries and $40 billion in mortgage-backed securities.

However, pointed out What was to be expected in terms of “tapering” (the beginning of the gradual withdrawal of stimulus), when we say it “soon may be guaranteed” is a moderation in the pace of debt buying.

“If good progress continues, as expected, the Committee considers that this moderation in the pace of asset purchases will soon be warranted,” the FOMC confirms.

Market watchers had been expecting the Fed to keep interest rates at their current all-time lows, but they were highly anticipating what would be announced in terms of the pandemic-era stimulus program.

There was a growing consensus that the US central bank could announce the start of “tapping”, but there were also those who considered that the Fed would postpone this slowdown in debt purchases, as the labor market is not yet strong and the specter of a permanent rise in inflation is fading away. Now, the Fed has dispelled doubts by saying that this withdrawal of stimulus will be soon.

But “although the announcement of ‘tapering’ will likely come in November, the fact that the Fed did not do so today reflects a committee that is still quite ‘pigeon’. [uma postura mais branda, acomodatícia]Peter Bokfar, chief investment officer at Bleakley Advisory Group, told CNBC. However, Jefferies chief strategist David Zervos noted to the same source that Powell, at today’s press conference, revealed a “slightly more hawkish” (not moderate) side than he had recently revealed.

wise owl

Powell has always been known to take a more “tougher” stance, not least because he is not in favor of monetary tightening in the name of financial stability, but he also advocates ideas that lean more on the “protectionist” side, and therefore is considered a man of the medium term.

When Powell was elected to run the Fed, Richard Fisher, the former chairman of the Dallas Fed, said the new leader was “neither a hawk nor a dove.” He then confirmed to the New York Times, “I was saying we all want to be a wise owl. And I think Powell fits perfectly into that category.”

The GDP adjustment is down and inflation is rising

Today was also Central Bank Day Update your forecast for economic growth, employment and inflation.

“With progress in vaccination and strong support for the measures put forward by policy makers, indicators of economic activity and employment continued to strengthen. The sectors hardest hit by the epidemic have improved in recent months, but the increase in Covid-19 has slowed the recovery,” says the Federal Reserve.

As a result, the central bank revised its estimate of GDP growth in 2021 down by 1.1 percentage points, which now stands at 5.9% (versus the 7% projected in June). For 2022, the Fed revised its GDP growth forecast by 0.5 percentage point upwards, which now stands at 3.8%.

The unemployment rate is now expected to be 4.8% this year, 0.3 percentage point higher than last June’s estimate.

“Overall, financial conditions remain favorable, partly reflecting measures to support the economy and the flow of credit to American businesses and families,” the report said.

The Fed also notes that the direction of the economy still depends on the course of the virus. He warns that “progress in vaccination programs should continue to limit the effects of the public health crisis on the economy, but risks remain on the economic outlook.”

As for inflation, he says that it is “mainly high due to temporary factors,” as he has repeatedly pointed out.

The Federal Open Market Committee said again that it is seeking a maximum employment level and an inflation rate of 2% in the long term. He explained that since inflation has consistently remained below this target, the committee has been accepting inflation moderately above 2% for some time, so that inflation will reach an average of 2%.

This statement reflects the new strategy of the Central Bank, which allows inflation to exceed 2% after periods of falling below this target. This change, remember, was announced by Powell In August last year.

The Federal Reserve revised its inflation forecast for this year up 0.8 percentage points to 4.2%. But it expects a slowdown in the next two years.

Half of the Fed now expects interest rates to rise in 2022

Another focus of the markets, for this Fed meeting, was on a “point chart” – a map that shows how each central bank representative estimates changes in key interest rates.

That map shows that half of the Fed now expects a rate hike early next year.

Hence, nine of the FOMC’s 18 members anticipate a rate hike in 2020, while only seven forecasts in June had such expectations.

All but one of the members anticipate at least one key rate increase by the end of 2023, and of those, 13 anticipate two increases through 2021.

Powell says withdrawing stimulus is not synonymous with higher interest rates

Jerome Powell, speaking after the Fed’s monetary policy decisions were announced, reiterated that tapering was “not intended to be an immediate signal” of an increase in key interest rates.

Thus the Fed Chairman declared that this withdrawal of stimulus is not synonymous with the “timing” of the Fed funds rate hike.

Powell, who is expected to remain in charge of the central bank for another term, also stated that it would be appropriate for the “tapping” to end in mid-2022.

However, the Fed chair also said at the press conference that many Fed members are convinced that hiring in the country has already met the central bank’s criteria for “more significant progress.”

When asked about the impact that September’s labor market data could have on future interest rate hikes, Powell replied that he’s not looking for specific numbers, but rather “cumulative progress.”

“For me, it wouldn’t take a very lively, brilliant, strong report” to raise rates. “You will need a reasonably good employment report to feel that this test has been passed,” he said.

“Many members of the committee feel that the test for significant additional progress in recruitment has already been passed … As for me, I think it has been almost passed,” he said.

(News last updated at 20:58)