Federal Reserve System Decision That Can Impact Your Investments

As wrote Infomoney, Fed maintains interest rate and sees rate close to zero at least until 2023. The meeting was the first after the official announcement of the change in the US monetary policy framework

Low Interest

The Federal Open Market Committee (Fomc) kept interest in the band between 0% and 0.25% in a monetary policy decision this Wednesday (16). The Federal Reserve’s monetary policy committee also decided to keep the discount rate at 0.25% and the interest rate on excess reserves (IOER) at 0.10%.

In addition, it signaled that it should keep interest rates close to zero at least until 2023 to help the US economy recover from the coronavirus pandemic.

The Fomc pointed out that “it expects to maintain this monetary policy stance until inflation expectations are well anchored at 2% per year”, which, according to the committee’s projections, will not occur before 2023.

The Scoreboard

The voting score was 8 to 2, with Robert Kaplan (president of the Dallas Fed) and Neel Kashkari (president of the Fed of Mineapolis) being the dissenting votes.

In addition, the monetary authority has signaled that it expects to maintain the current interest rate until the labor market has reached levels consistent with full employment assessments, reiterating its commitment to using all tools to support the American economy.

The Fed projects a 2020 GDP drop less than the previous estimate, but growth in 2021 and 2022 slower than previously projected, repeating that the activity path continues to depend significantly on the course of the coronavirus outbreak.

New Projections

In new economic projections, Fed officials see activity contraction by 3.7% this year, by the median of estimates, against a 6.5% drop projected in June.

For 2021, the expectation is now for growth of 4.0%, less than the 5.0% increase in the median of June projections. In 2022, GDP is projected to advance 3.0% (from 3.5% previously). In the longer term, the forecast is for growth of 1.9% (from 1.8% in June).

The Fed also expects the unemployment rate to continue to fall. According to updated forecasts, released on Wednesday, 16, the unemployment rate is expected to remain at 7.6% in 2020, when in June the expectation was 9.3%.

Beyond The Forecasts

For 2021, the forecast in June was 6.5%, but now it is 5.5%. For 2022, it went from 5.5% to 4.6%. In 2023, the projection is at 4.0%. In the long run, the median of expectations is the unemployment rate of 4.1%.

The monetary authority also raised projections for the consumer spending price index (PCE), the institution’s preferred inflation measure. According to the released updates, the median of the projections for the PCE in 2020 rose from 0.8% (in June) to 1.2%. For 2021, it went from 1.6% in June to 1.7% now.

In the year 2022, the median of the projections for the PCE is up 1.8%, compared to 1.7% in June. In 2023, it is at 2.0%, the same long-term rate in the projections. For the core of the PCE, leaders expect 1.5% in 2020 (from 1.0% in June), 1.7% in 2021 (from 1.5%) and 1.8% in 2022 (from 1.7 % in June). In 2023, the expectation for the PCE nucleus is 2.0%.

Another Point On The Table

Another sign was that the monetary authority will maintain purchases of US Treasury bonds and assets backed by agencies at least at the current pace, in order to help stimulate accommodative financial conditions.

At a press conference after the meeting, Jerome Powell, Fed chairman, reiterated that consumer spending recovered about 75% from its decline and that economic activity accelerated from the depressed level in the second quarter, while there are signs of improvement in investment business.

However, he pointed out that economic activity in general remains well below pre-pandemic levels and that the path remains foggy, stressing: “the outlook for the economy remains extraordinarily uncertain”. Thus, although there has been an improvement in activity, the American Central Bank remains committed to using the full range of tools and that the economy will need more fiscal and monetary support.

Powell also pointed out that the pandemic has left a significant mark on inflation. According to him, weaker demand in some of the most affected sectors has held consumer prices down, making inflation below the objective of the monetary authority: “despite higher prices for some consumer goods, general inflation remains contained ”.

Another Framework

The meeting was the first after the official announcement of the change in the US monetary policy framework and, as a result, it brought an additional factor of attention to investors.

The newly adopted structure promises to launch inflation to a level above 2% to compensate for periods, such as the current one, when it is below the target.

The strategy means that the monetary authority can maintain rates at stimulating levels even if unemployment continues to fall at a faster rate than expected.

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