Fed Keeps Interest Rates Unchange

The Federal Open Market Committee (FOMC) announced the latest interest rate decision on Wednesday local time to keep interest rates unchanged, in line with market expectations. The FOMC statement stated that it will reduce the size of monthly asset purchases by US$30 billion, compared to a monthly reduction of US$15 billion. The Fed’s dot plot shows that the Fed is expected to raise interest rates three times in 2022 and three times in 2023.

The Fed provided a number of signs to the market on Wednesday that its ultra-loose policy since the beginning of the new crown epidemic is about to end, and its actions are even more radical than market expectations.

The US Federal Open Market Committee (FOMC) announced the latest interest rate resolution on Wednesday, local time, maintaining the benchmark interest rate at 0%-0.25%, maintaining the excess reserve interest rate (IOER) at 0.15%, and repurchasing overnight. The interest rate remained unchanged at 0.05%, in line with market expectations.

The FOMC statement stated that starting from January next year, the monthly asset purchase scale will be reduced by US$30 billion, that is, the monthly US Treasury purchases will be reduced by US$20 billion, and the mortgage-backed securities (MBS) will be reduced by US$10 billion. One hundred million U.S. dollars. The statement said that the committee believes that it may be appropriate to reduce net purchases of assets every month, but if the economic outlook changes, it will be prepared to adjust the speed of debt purchases.

The Fed’s dot plot shows that all committee members expect the Fed to start raising interest rates in 2022. Specifically, it will raise interest rates three times in 2022 and 2023. The committee members held a hawkish attitude towards policy measures and firmly inclined to raise interest rates. Among the 18 FOMC committee members, 12 members believe that interest rates will be raised at least 3 times next year, and 6 are expected to raise interest rates less than 3 times next year. No committee member sees interest rates remaining near zero next year.

Fed officials have long emphasized that inflation is “temporary,” and Fed Chairman Powell defined it as unlikely to have a lasting impact on the economy. However, the term has become a derogatory term, and it was announced after the December meeting that it had been deleted. Powell expressed this move in testimony to Congress last month, saying that “this may be a good time to drop the term and try to explain more clearly what we mean.”

In addition, the Federal Reserve also deleted the description of the average inflation target in the resolution, but admitted that “the inflation rate has exceeded the 2% target for some time.” At the same time, maintaining the current interest rate target range has restricted the conditions to focus only on the full employment target. .

The FOMC statement stated that employment in the United States has grown steadily and the unemployment rate has fallen sharply. There are still risks to the economic outlook, including risks from new strains. In challenging times, the Federal Reserve is committed to using its full range of tools to support the U.S. economy, thereby promoting its maximum employment and price stability goals.

The statement stated that the imbalance between supply and demand related to the epidemic and economic reopening continues to lead to higher levels of inflation. The economic path continues to depend on the course of the new crown epidemic. The progress of vaccination and the alleviation of supply constraints are expected to support the continued growth of economic activity and employment, as well as the reduction of inflation. Risks to the economic outlook still exist, including new variants from the new coronavirus.

In addition, the committee also lowered its forecast for US economic growth this year. It is expected that GDP will grow by 5.5% in 2021, compared with 5.9% in September, and it also raised its inflation forecast for this year. Specifically:

The median GDP growth forecasts for 2021, 2022, and 2023 are 5.5%, 4%, and 2.2%, respectively. The September forecasts are 5.9%, 3.8%, and 2.5% respectively;
The median PCE inflation expectations for 2021, 2022, and 2023 are 5.3%, 2.6%, and 2.3%, respectively, and the September expectations are 4.2%, 2.2%, and 2.2% respectively;
The median core PCE inflation expectations for 2021, 2022, and 2023 are 4.4%, 2.7%, and 2.3%, respectively, and the September expectations are 3.7%, 2.3%, and 2.2% respectively;
The median expected unemployment rates for 2021, 2022, and 2023 are 4.3%, 3.5%, and 3.5%, respectively. The September expectations are 4.8%, 3.8%, and 3.5%, respectively.
After the FOMC statement, according to the CME “Federal Reserve Observation”, the probability of the Fed maintaining interest rates in the 0%-0.25% range in January next year is 87.4%, the probability of raising interest rates by 25 basis points is 12.2%, and the probability of raising interest rates by 50 basis points is 0.4. %; the probability of maintaining interest rates in the 0%-0.25% range in March next year is 53.6%, the probability of raising interest rates by 25 basis points is 41.3%, and the probability of raising interest rates by 50 basis points is 5.0%.

Reviewer overview

Fed Keeps Interest Rates Unchange - /10

Summary

The Federal Open Market Committee (FOMC) announced the latest interest rate decision on Wednesday local time to keep interest rates unchanged, in line with market expectations. The FOMC statement stated that it will reduce the size of monthly asset purchases by US$30 billion, compared to a monthly reduction of US$15 billion.

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