The long-awaited Fed meeting took place, and it was business as usual. Jerome Powell’s speech was quiet and calm, as was the brief statement delivered by the FOMC.
No clear dates were knowns on tapering or the Fed’s concern about the debt ceiling. However, most analysts have overlooked that the Fed opened a door that previously seemed impossible.
In its economic projections, the Federal Reserve modified the expectations of economic growth. In addition, it brought the date of an interest rate hike closer to 2022.
Financial markets took a look at the Fed’s pronouncements, and saw nothing disconcerting, but focused their attention on other matters. Following Jerome Powell’s words, the Fed seemed more willing to raise its benchmark interest rate more aggressively than before. This would give new meaning to the monetary policy of the world’s leading economy.
What the Fed’s Said and What It Changed in Its Speech
“If progress continues broadly as expected, the committee judges that a moderation in the pace of asset purchases will soon be warranted,” the statement after the FOMC meeting said.
The Fed chairman said an announcement on tapering could “easily” come at the next meeting in November, and that it is not contingent on a “shocking” payrolls report.
At another point, the Fed chairman said there are interesting signs that suggest “the labor market is very tight.”
He noted that wages are rising, that there are 11 million job openings, and that there are widespread reports from employers across the economy that it is quite difficult to hire people. These are all factors mentioned by Fed officials that they wanted to taper “sooner rather than later.”
Another factor is what Powell did not say. Most Wall Street economists had predicted that Powell would stress that tapering decisions were divorced from any initial rate hikes.
Powell also said that “inflation is elevated and will remain so in the coming months before moderating.” So financial markets appear to be calm for the time being, unaware that they are tied to what “could be a roller coaster ride” in 2022.
Other Secrets of the Fed’s Statement
Nine of the 18 members of the Fomc see it appropriate for rates to rise in 2022, two more members than three months ago. The other half of officials are not in favor of tapping rates until 2023.
About inflation, the central bank said it would stand at 4.2% by the end of the year, to drop to 2.2% the next two years.
Likewise, projections for 2024 were also released for the first time, and the figures suggest a federal funds rate of 1.8% by the end of that year. On the other hand, by 2023 it rose to 1% from the previous 0.6%.
What to Expect After the Fed?
- Investors will wait until November as the latest deadline for the central bank to modify tapering.
- The dollar will remain under pressure until the Fed is clear in its decisions.
- The potential chaos over Evergrande’s real estate problem in China seems to have been overcome, following the injection of money from the Asian country’s central bank.
- The markets remain attentive to the American Congress raising or modifying the debt ceiling.
- Oil remains in good shape. OPEC+ must be able to meet the required supply of crude oil.
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