The Federal Reserve has said US interest rates will stay low and its other measures to support the world’s largest economy will remain in place until employment and inflation recover from the COVID-induced slump. The Fed specified the conditions for a rate increase and indicated that higher rates were at least three years away.
After the first meeting of policymakers since the US central bank laid out its new policy framework, the Fed said it was committed to using its full range of tools to support the economy and promote maximum employment and price stability amid the ‘tremendous human and economic hardship’ caused by the coronavirus crisis across the country and worldwide.
Leaving the benchmark fed funds rate at 0.0%-0.25%, in line with market expectations, FOMC policymakers provided guidance on the circumstances under which they will lift interest rates off the floor. The wording was arguably a little disappointing and certainly not more dovish than expected.
The Fed said rates would be kept steady until labour market conditions improved and were consistent with its assessment of maximum employment, and inflation had risen to the 2% target and was on track to “moderately exceed [2%] for some time.” The possibility of inflation hovering above the target for a period had been introduced in the recently updated policy framework.
Clarifying the tolerance for above-target inflation
Fed Chair Powell clarified after the meeting that “moderately exceed” was not the same as a large deviation from the 2% target and “for some time” was shorter than a sustained period.
Central bank policymakers had indicated that the employment and inflation goals should have been achieved on a sustained basis – say, over the course of a year – before rates would be increased. Projections published after the latest meeting showed that the median forecasts of FOMC committee members were for inflation to return to 2% and unemployment to fall to 4% by 2023.
In our view, Powell’s comments are not dovish: if you do not want to engineer ‘large’ overshoots of target inflation at any point, you cannot wait too long with current interest rates at the floor once you expect inflation to overshoot at all.
What happens to asset purchases over the medium term?
More strikingly, there was no guidance on asset purchases (quantitative easing, QE) over the medium run. The Fed only said that “over coming months” asset purchases will continue “at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions”.
We believe most investors expect the Fed to continue with QE for years until the conditions are in place for rates to rise.
Commenting on the latest projections, the Fed said the data now looked a little better than the June numbers, with activity and employment having picked up in recent months. Growth over the year to Q4 2020 was revised up by almost three percentage points; the expected unemployment rate was a full percentage point lower in 2021 and almost a percentage point lower in 2022.
Clues needed on inflation, employment beyond 2023
It is worth noting that the median projections are for inflation to reach 2.0% in the fourth quarter of 2023 – at the same time as the unemployment rate falls to just below the long-run equilibrium rate, that is, the point at which demand for labour just exceeds supply and inflation could start to edge up. Wage inflation could be a trigger for the Fed to start raising interest rates.
In short, the projections start to become interesting at the very end of the forecast period. Inflation has just reached the target but we don’t know what the Fed expects to happens to inflation beyond this point. The message seems to be that rate increases are possible in 2024. That is corroborated by the ‘dot plot’ (see below), which has all but four FOMC members projecting rates on hold until the end of 2023.
Exhibit 1: Here is what FOMC participants expect to be the US fed funds rate over the 2020-2023 period (‘dot plot’; midpoint of target range in %)
Source: US Federal Reserve; Sept 2020
Given recent history, the expected recovery in inflation looks optimistic: Very low unemployment did not cause strong core inflation before the pandemic. That could suggest that rates lifting off could occur even later than 2024. And any major negative shock to the economy in the meantime could delay that.
There is relatively little the Fed can do to boost demand, with interest rates already at rock bottom. Policymaking is stuck at the lower bound waiting for good luck or good fiscal policy to reflate the economy.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Writen by Investors’ Corner Team. The post US interest rates to stay at rock bottom until 2023 appeared first on Investors’ Corner – The official blog of BNP Paribas Asset Management.
Here’s What Retail Investors Are Most Interested In Buying
Here’s What Retail Investors Are Most Interested In Buying
U.S. retail investors, enticed by a brief pause in the interest rate cycle, came…
Ticking Time Bombs: 3 Homebuilder Stocks to Dump Before the Damage Is Done
The housing market is in a tricky spot right now. Higher interest rates are causing problems and distortions in the market. With the average interest rate…
Don’t Miss the Boom: 3 Fintech Stocks Set to Explode Higher
The fintech sector has significantly benefited from the advances in technology and the past few years have seen a solid growth of this sector. The pandemic…
Uncategorized9 hours ago
Closing Bell: Nothing inflated about ASX as steady August CPI baked into latest loss, benchmark now short -2.4pc this week
Energy & Critical Metals20 hours ago
Germany Edges Closer to 50% Renewable Energy Milestone Amid Solar Slowdown
Uncategorized13 hours ago
High Voltage: PMT’s Corvette lithium resource could be a 300Mt titan… if an ENTIRE LAKE can be drained first
Financing News22 hours ago
West High Yield (W.H.Y.) Resources Ltd. Announces Appointment of New Auditor
Economics24 hours ago
Don’t Miss the Boom: 7 Dividend Stocks Set to Explode Higher
Economics19 hours ago
USD/CHF: Franc suffers longest losing streak since 1975
Economics23 hours ago
Ticking Time Bombs: 3 Blockchain Stocks to Dump Before the Damage Is Done
Precious Metals14 hours ago
First-Ever Filming Of Singapore’s Gold Reserves In Super-Secret Gold Vault