US monetary policy: Fed wants zero rates by 2023

“The world is not enough” was already known to super agent James Bond in the late nineties. The Hollywood movie title could also carry over to the financial markets these days.

The US Federal Reserve announced that it would keep interest rates in the United States at zero until the end of 2023, and yet the markets are still dissatisfied with this monetary policy decision. The world of zero interest rates really doesn’t seem like enough to them.

Because while Fed Chairman Jerome Powell was still answering journalists’ questions, the S&P 500 stock index turned negative. Tech stocks, in particular, slumped. The Nasdaq index detraded with a loss of more than one percent.

“The Fed meeting was a slight disappointment for the markets. The monetary authorities had no new monetary policy impulses up their sleeves, “said Ebrahim Rahbari, a strategist at the main US bank Citi.

Inflation recently well below two percent

The Fed’s promise to intervene in an emergency, the Fed’s so-called proposal, will continue, he judged. However, it was no longer fed with money, although financial markets had expected exactly that in advance.

The market reaction reveals the high expectations placed on central banks. Just two weeks ago, Powell presented the Fed’s new inflation target.

This stipulates that the central bank will manage the inflation rate more flexibly than before and thus no longer target as a point target of two percent, but rather as a long-term average.

Given that inflation has been well below two percent in recent years, this has fueled expectations in the markets that the Fed will not only keep its interest rates low for longer, but could take more action on this. meeting to raise prices. float.

Financial markets were deterred

But the Fed only complied with interest rates. The monetary authorities predict that there will be no rate hikes until at least the end of 2023, and note that monetary policy will not tighten until inflation exceeds two percent “for some time.” The new inflation target is now officially codified in the targets of the US monetary authorities.

In addition, some market participants had also expected that the Fed would increase its current bond purchases in light of persistently low US inflation and, in particular, would buy longer maturities. But that’s exactly what the Fed didn’t do, and Powell didn’t really care about that.

The new strategic framework was “effective,” the Fed chief said when asked. The Council was convinced that interest rates would stimulate the economy for a long time.

But despite those reassuring words, financial markets were quite put off. “Stock traders have realized that the Fed has not gone as far as expected. All the stock market gains for the day were gone, ”observed Andrew Brenner of NatAlliance Securities.

Disagreement within the responsible body

The Fed’s decision is particularly explosive because it was the last monetary policy meeting before the next US presidential election.

The Fed, which repeatedly prides itself on its political independence, obviously did not want to be suspected of supporting either candidate. Acting President Donald Trump had repeatedly stylized stock markets as the yardstick for his success.

After all, the monetary authorities significantly raised their economic forecasts for the current year. Just wait 3.7 percent less. In July, Fed economists had expected an economic recession of 6.5 percent. The Fed has also significantly raised its expectations for the unemployment rate and is now forecasting a 7.6 percent rate compared to the previous year.

The custodians of the dollar were obviously not entirely on board with the current rate. Two members of the 10-member FOMC Council (Federal Open Market Committee) voted against the decision, albeit for different reasons.

While Dallas Fed Chairman Robert Kaplan did not want the new inflation target to be anchored in monetary policy strategy, Minneapolis Fed Chairman Neel Kashkari advocated a more detailed definition of the target. inflation.

Bond markets were also unhappy that Powell was not announcing a new rush of money. Long-term bond yields, in particular, rose significantly. The zero interest world through 2023 is obviously not enough for bond investors either.