Fed Remains Optimistic and Leaves Monetary Policy Unchanged

June 16, 2021, | AtoZ Markets- As expected, the Federal Open Market Committee (FOMC) unanimously kept its interest rate unchanged. However, the Fed hinted that rate hikes could come as soon as 2023, modifying last March’s forecast of waiting until at least 2024.

Though the Fed raised its headline inflation expectation to 3.4%, a full percentage point higher than the March projection, the post-meeting statement continued to say that inflation pressures are “transitory.” The raised expectations come amid the biggest rise in consumer prices in about 13 years.

Federal Reserve Issues FOMC Statement

In its official statement, the Fed mentioned the strong recovery in the economic environment due to the intensive vaccination process in the United States and globally.

“Progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement.”

The positive tone in his statement on the economic outlook was also aimed at inflation, making it clear that its effect is transitory, and that for now he is not concerned.

“Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”

Also, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached maximun levels and inflation is on track to moderately exceed 2 percent for some time.

Read the complete statement here

In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

What Did the Fed Change at Today’s Meeting?

Federal Reserve Chief Jerome Powell said today that some of the dynamics associated with the reopening are “increasing the possibility that inflation will turn out to be higher and more persistent than we anticipate.”

He also pointed out the strong rebound in American growth, which now has in the new Fed projections a GDP of 7% in 2021, while in the previous projections of last March the value was 6.5%.

Check here the previous March figures from the Fed

We can also see that in reference to inflation, the central bank increased its figures to 3.4% from 2.4% in March. “Our expectation is these high inflation readings now will abate,” Powell said at his post-meeting news conference.

Powell also cautioned about reading too much into the dot-plot, saying it is “not a great forecaster of future rate moves. “Lift-off is well into the future,” he said.

Summary of Economic Projections

Market Impact

Recent indicators show that U.S. is expanding at the fastest rate since World War II. But that growth also has come with inflation, and the central bank has faced pressure to start curtailing the $120 billion in bond purchases it is making each month.

Markets reacted to the Fed news, with stocks falling and government bond yields higher.

Also, markets had been looking for the possibility that the committee would address its open-market operations where it provides short-term funding for financial institutions.

The so-called overnight repo operations, where banks exchange high-end collateral for reserves, have been seeing record demand lately as institutions look for any yield above the negative rates they are seeing in some markets.

The committee did raise the interest it pays on excess reserves by 5 basis points to 0.15%. In a separate matter, the FOMC announced that it would extend dollar-swap lines with global central banks through the end of the year.

In the forex market, the Fed’s decision allowed the dollar to strengthen against its main rivals. 

In the case of EUR/USD, the price fell more than 100 pips with the news, and at this time it is trading around the 1,2000 zone. At the bear level, the next levels to consider are at 1.1980 and 1.1937 respectively.

However, if the price manages to recover above 1.2051, we could see it again at 1.2090. All of this depends on the strength investors see in the greenback.

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