Jerome Powell, chairman of the US Federal Reserve, speaks at a news conference after the Federal Open Market Committee (FOMC) meeting in Washington on February 29, 2020.
Andrew Herrer | Bloomberg | Getty Images
The Fed doesn’t expect inflation to rise for years, and is willing to keep rates at zero even after that happens.
The stock has initially rallied after the Fed released its post-meeting statement and its latest economic forecast, indicating that it is expected to keep interest rates at zero until at least 2023. Shares relinquished their advantage after being briefed to the media by Fed Chairman Jerome Powell, calling the Fed’s guidance strong and “powerful.”
“It’s a great and powerful Oz. Investors were deceived. They thought the advanced guidance meant something, but when they peeked behind the scenes they realized the Fed couldn’t do anything, and the market moved on,” said Michael Arrow. Strategist on State Street Global Advisors.
Travel yields have risen slightly after Powell said the Fed plans to keep its assets at current levels by buying them. Some bond market proponents expect the Fed to increase Treasury purchases, and Powell did not commit to that. The 10-year Treasury yield rose 0.695%.
“We will continue to monitor development, and we are ready to adjust our plans properly,” Powell said.
But it was the Fed’s guidance that the markets got the dive. According to the Fed’s latest forecast, headline inflation is expected to remain low and reach the Fed’s 2% target by 2023. At the same time, the job market is expected to improve to the point where unemployment is 4% lower in 2023, below the long run rate of 4.1%.
“This is proud – long, low equities, low rates for a weak dollar,” said John Hill, BMO’s senior fixed income strategist. “The Fed says we’re not going hiking in 2023, maybe in 2024 … this is what they’re talking about. We expect them to barely meet and even then, they’re raising rates. Not. “
Last month the Fed announced a change in its policy, where it will now allow inflation to run above its target for some time before raising rates. But in the central trend of the Fed’s forecast, the Fed rates inflation below 2% by 2022. It expects core PCE inflation to be 1.3% to 1.5% this year and 1.6% to 1.8% next year. By 2023 the pace will reach 1.9% to 2%.
But Abby’s economist Eric Vinograd said Powell may have cut back on the evil message he was sending.
“The statement said that targeting inflation for ‘some time’ means that they are not targeting ‘continuous’ overshoot. So how long will ‘a little time’ take if it is not sustained?” Vinograd said. “That pollution is a problem that the committee has to address in order to reap the full benefits of the framework shift. It is no coincidence that the stock market, which is in a positive territory, turned negative after the chair’s comments. “
Powell said the Fed expects inflation to eventually improve.
“It’s a very strong forward-looking guide, and we think it will be a sustainable guide that will provide significant support for the economy.”
While some Wall Street strategists and investors believe inflation could be a problem, the Fed has said it is more concerned about sterilization.
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