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On March 17, local time, the two-day Fed meeting on interest rates ended. After the meeting, the Federal Reserve announced its latest March interest rate resolution and decided to maintain the federal funds indicator interest rate unchanged at 0-0.25%, in line with market expectations. In addition, the Federal Reserve raised its forecast for the U.S. economy, predicting that U.S. GDP will grow by 6.5% in 2021, which is higher than the forecast in December last year. However, Fed Chairman Powell emphasized that the prospect of economic recovery depends on the trend of the epidemic.
At the time when the Federal Reserve announced its interest rate decision, U.S. bond yields continued to rise, which intensified investors’ concerns about U.S. inflation. In this regard, Powell emphasized that rising inflation is only a short-term pressure. Although the outlook for the US economy has improved and it has turned to inflation this year, it is not expected to raise interest rates until 2023.
Many market analysts also said in an interview with a reporter from the 21st Century Business Herald that inflation is only rising in the short term, so the Fed’s loose monetary policy stance will not change for the time being. They emphasized that the current precondition for the Fed to raise interest rates is not on inflation, but on employment.
The Fed does not expect to raise interest rates until 2023
In its statement after the meeting, the Federal Reserve once again promised to use all its tools to support the U.S. economy during this challenging period. The Fed emphasized that the Federal Open Market Committee (FOMC) will maintain a loose monetary policy stance until “substantial further progress” is made in the dual goals of full employment and price stability.
In addition, the statement stated that the Federal Reserve will continue to hold at least US$80 billion in US Treasury bonds and US$40 billion in institutional mortgage-backed securities each month until the two major goals have made substantial progress. These asset purchases help promote stable market operations and a relaxed financial environment, and support the flow of credit to households and businesses.
The Federal Reserve stated that the FOMC will continue to monitor information that has an impact on the economic outlook when assessing appropriate monetary policy positions. If there are risks that may hinder the Fed from achieving its goals, the FOMC will be prepared to appropriately adjust its monetary policy stance.
Powell said at a press conference that most FOMC members do not expect to raise interest rates until 2023, and it is not yet time to discuss reductions in debt purchases.
Powell emphasized, “Before the Fed considers balance sheet reduction, it needs to see substantive further progress in achieving its long-term inflation of 2% and maximizing employment goals. Before we send a signal to consider shrinking balance sheet, the market can assume that we are shrinking balance sheet. The time has not come.”
Affected by Powell’s remarks, the U.S. stock market rose sharply on March 17. The S&P 500 index and the Dow hit a record high, closing at 3,974.12 and 33,015.37 points, respectively.
Matt Simpson, senior analyst at Jiasheng Group, told the 21st Century Business Herald that the Fed raised its growth and inflation forecasts while promising to maintain low interest rates until after 2023, which maintained perfect conditions for stock market valuations to rise.
Although the interest rate resolution is in line with expectations, the “dot plot” shows that Fed officials’ views on interest rate expectations have changed slightly from last year. Four of the 18 FOMC members expect to raise interest rates in 2022, and seven of them expect to raise interest rates in 2023. At the meeting in December last year, only one committee member expected to raise interest rates in 2022, and five expected a rate hike in 2023.
Hong Hao, the managing director and head of the research department of BOCOM International, commented that although Powell emphasized last night that interest rates would not be raised until 2023, the FOMC committee members were “slightly eagle-eyed about marginal changes in interest rate policy.”
Simpson also said that the “dot map” showed that interest rate hike willingness has increased, but it did not happen as early as the market feared.
The market does not need to worry about inflation risks for the time being
Before the announcement of the interest rate resolution, the yields of 10-year and 30-year U.S. Treasury bonds rose sharply in early trading on March 17, hitting a new high in more than a year. Fearing that inflationary pressures may pose a greater danger than the Fed believes, the market has recently become nervous.
However, senior financial expert Li Huihui told the 21st Century Business Herald that the increase in inflation expectations this round was mainly driven by the rise in crude oil prices since November last year, but it is expected that as Saudi Arabia gradually resumes crude oil supply, the US fiscal policy stimulus is expected to gradually cool down. Oil prices are expected to gradually level off, and inflation expectations are expected to stabilize.
Powell also soothed market sentiment at a press conference on March 17 and refuted speculation that the Fed might begin to withdraw from quantitative easing. He emphasized that overall, the current financial conditions are still highly accommodative, so there is “no need to react to the sharp rise in U.S. bond yields in the past month.”
Powell also explained the issue of inflation tolerance at the meeting. The current 10-year breakeven inflation rate in the United States has rebounded to 2.21%, exceeding the level before the epidemic. But Powell said that he hopes to see further substantial inflation before he considers any action.
Powell said, “We hope that inflation will be moderately higher than 2% for a period of time, and people always want to quantify this goal. But talking about inflation is one thing, achieving inflation is another thing, and the Fed wants to be able to achieve it. Our inflation target does not want to quantify it too clearly, because it is difficult, and we have not achieved it yet. The key to the new framework of’fixing the average inflation target’ (AIT) is that we will not preemptive We take actions based on predictions. Only through actions can we build credibility.”
Joe Perry, a senior analyst at Jiasheng Group, told reporters of 21st Century Business Herald that “fixing average inflation” means that the Fed can tolerate inflation overshoots for a long time, aiming to make the average inflation of a business cycle reach 2%. Monetary policy will not be tightened, so if inflation exceeds 2% for a few months in the future, it will not necessarily affect the policy direction. However, if inflation exceeds 2.4% for several consecutive months, the Fed’s loose monetary policy may face more challenges.
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