Federal Reserve Not in Rush to Do Anything, Currently At A “Talking-About-Talking-About” Tapering Level
The central bank officials anticipate two interest rate increases by 2023-end but Chairman says take these forecasts “with a big grain of salt.” For now, inflation estimates are increased to 3.4% in 2021 while $120 billion a month will keep on printing.
The crypto market remains subdued along with the stock market after the Federal Reserve dropped the bomb of a major shift in monetary policy.
Gold ended up falling under $1,800 per ounce, down 6.3% this month. Meanwhile, the US dollar rallied to nearly 91.85, a level last seen in mid-April when it was going down.
Short term market reaction to the Fed statement, release time (red circle).
S&P500 = Blue
Bitcoin = Orange pic.twitter.com/wBVikKA1WC
— Mati Greenspan (tweets ≠ financial advice) (@MatiGreenspan) June 16, 2021
After falling to $38,000 on Wednesday, today, we are back around $39,500, however, the Bitcoin market maintains its sideways action and is yet to give any clear indication if the bull market is intact or it is over.
The Fed, however, has started to speed up its expected pace of policy tightening amidst heightened concerns for inflation and optimism about the labor market.
Fed Chair Jerome Powell sugarcoated their move, dismissing the dot plot which is “very hawkish,” with no real talk on tapering, rather only talking about talking.
“The economy has clearly made progress,” Powell said after a two-day gathering of the Federal Open Market Committee. “You can think of this meeting as the talking-about-talking-about meeting if you like,” he said, referring to the discussion about tapering purchases.
So, officials would begin a discussion about scaling back bond purchases to support financial markets and the economy, but it is not happening in the immediate term.
The Fed also released forecasts, a dot plot of individual member expectations, showing they anticipate two interest rate increases by the end of 2023. The central bank had a target range for benchmark policy unchanged at zero to 0.25% since March 2020 and maintained the $120 billion pace of monthly bond purchases.
The quarterly projections showed 13 of 18 officials favored at least one rate increase by 2023-end versus seven in March and 11 officials saw at least two hikes by then.
“The dots should be taken with a big grain of salt,” Powell said, referring to the interest-rate forecasts. He cautioned that discussions about raising rates would be “highly premature.”
The Fed also upgraded its estimates for inflation for the next three years. Officials see price pressures rising 3.4% in 2021 compared with a March projection of 2.4%. Both the 2022 and 2023 forecast rose by 0.1% to 2.1% and 2.2% respectively.
“As the reopening continues, shifts in demand can be large and rapid, and bottlenecks, hiring difficulties, and other constraints could continue to limit how quickly supply can adjust — raising the possibility that inflation could turn out to be higher and more persistent than we expect.”
The Fed Chair also said that he is “confident that we are on a path to a very strong labor market.”
Despite being concerned about the latest inflation data, Fed officials “don't seem to be in any rush to do anything about it,” wrote Mati Greenspan in his daily newsletter Quantum Economics. Also, they're still printing about $120 billion a month in quantitative easing.
Even though the bond markets made some small movements, “for now the markets remain flush with cash for the foreseeable future.”