The Federal Reserve of the United States left the federal funds rate unchanged yesterday. Moreover, it signaled no intention to raise the rates in the near future, minimum until the end of 2022.
During the press conference that followed, Fed’s Powell was crystal clear about what the market should expect in terms of futures interest rates – the Fed is “not even thinking about raising rates anytime soon.” He also suggested that the current monetary policy stance is appropriate, tempering the expectations that the Fed will signal an active yield curve control strategy.
The Fed sees the real GDP recovering – growing from -6.5% in 2020, to 5% in 2021 and 3.5% in 2022 – while for the longer run considering a range of 1.7%-2%. Inflation is expected to miss the target in the years ahead, but to come back to 2% by 2022.
Fed Not Dismissing More Actions to Come – Both Monetary and Fiscal
Fed’s Jerome Powell expressed moderate optimism about the economic recovery, indicating that it is unlikely that all those who lost their jobs will find their way back into employment easily. Also, he stressed the uncertainty surrounding the coronavirus and a possible second wave of infections.
The Federal Reserve also pointed out that the jobs market may have hit bottom in April and that the May NFP number was a nice surprise – but it stressed that the road ahead is ambiguous and full of uncertainty.
While admitting that the current monetary policy is appropriate at this point in time, the Fed clearly expressed a dovish stance moving forward. Moreover, it suggested the Congress may need to act too, depending on how the economic recovery evolves.
On an interesting note, Powell avoided answering one question regarding a possible bubble forming on the US equity market. He simply dodged the question, although we would not know if it was intentional or not.
All in all, the Fed recognized the severity of the recession, while discounting any resemblance with the 1930s Great Depression. It stands ready to do more and to adjust its monetary policy tools and facilities available, should the need arise.
Finally, the economic projections for the years ahead reflected the easy stance at the Fed. Literally, there’s unanimity in keeping the interest rates lower for an extended period of time, as well as doing more in case the economic recovery falters.