Fed Promises to Keep Monetary Policy Loose; Interest Rate Near Zero & Inflation Above 2%
The dovish tone from the Fed is pushing the USD down, which has been falling throughout this month while the risk-on environment is good for both stocks and bitcoin.
“The economy is beginning to move ahead with real momentum,” Jerome Powell, Federal Reserve chair, told reporters Wednesday after the central bank held interest rates near zero and kept bond purchases at $120 billion a month.
Powell reiterated that it is not the time to discuss scaling back asset purchase. “When the time comes for us to talk about talking about it, we’ll do that. But that time is not now,” not until there is more than one great job report, he said.
As for the concerns around inflation due to the Fed’s aggressive support, Powell said though prices are likely to rise amidst surging demand, it is just,
“An episode of one-time price increases as the economy re-opens is not the same thing as, and is not likely to lead to, persistently higher year-over-year inflation.”
The central bank is interested in keeping the inflation above the 2% target and only when it was to move “persistently and materially above 2%” that threatens to move longer-term inflation materially above 2% that the Fed will use its tools to bring it down to mandate consistent levels, he said.
Michael Gapen Chief U.S. Economist at Barclays Plc
“Markets are having a hard time digesting this.”
“The Fed is saying, ‘I hear you. Inflation is going to be above 2% for a while, but I am trying to tell you we are not going to do anything about it.”
President Joe Biden, meanwhile, is all set to unveil a $1.8 trillion plan after a $2.25 trillion infrastructure proposal and the $1.9 trillion pandemic relief package was signed into law last month. This time to expand educational opportunities and child care.
Carl Tannenbaum Chief Economist at Northern Trust in Chicago
“I took away that not even any preliminary discussion of a change in policy is imminent.”
“He gave a spirited defense of the Fed’s view on inflation and employment. They are very happy with the course they are on and not likely to change it soon.”
How’s the Market Feeling…
This opens the doors for the continuation of a risk-on environment, which means investors are willing to enter into higher-risk investments like Bitcoin and stocks, wrote Deutsche Bank in a report published this week.
S&P 500 jumped to a record high in part bolstered by Fed’s same dovish tone and in part the ongoing tech earnings report. However, the promise of keeping the monetary policy loose is not turning out good for the dollar.
The USD index has been going down throughout this month and is currently near 90.6, while gold is still around $1,780 per ounce.
As for Bitcoin, it is hovering around $54k, which is giving altcoins a perfect chance to run higher.
Amidst this, the White House released a slew of tax increases in its “The American Families Plan,” as per which top personal income tax rate is raised from 37% to 39.6% for all taxable income north of about $550,000 for individuals and about $650,000 for married couples.
The top individual tax gain rate on long-term capital gains and dividends would be increased from 23.4% to 43.4%.
It is also proposing to give the IRS the authority to regulate paid tax preparers. They would get an annual report on the money deposited and withdrawn from every bank account in America.