US Federal Reserve Expects Further Growth – E24

The Federal Reserve (Fed) presents a recent decision on interest rates and the outlook for the economy on Wednesday.

As expected, the interest rate remains unchanged in the range of 0 to 0.25 percent. Support purchases of various fixed income securities total $ 120 billion per month.

These purchases are intended to help ensure that households and businesses can continue to borrow money.

– They were not expected to make any changes to either the future interest rate outlook or support buying, says Knut Magnussen at DNB Markets at E24.

Most of the 18 who set interest rates still anticipate that interest rates will not rise until after 2023, but the number expecting a first rate hike in 2022 or 2023 has risen from five to seven since the previous meeting. according to the Wall Street Journal.

At a press conference after the monetary policy meeting, central bank governor Jerome Powell was asked about the outlook. He then emphasized that it is difficult to predict interest rates so far in the future.

– The prospects for the economy in two or three years are very uncertain. I wouldn’t focus too much on the interest rate outlook for that long, says Powell.

Stock markets are rising

Before Wednesday’s interest rate decision, the broad S & P500 index and the Nasdaq index were lower for the day, while the Dow Jones index rose slightly.

A little after 8pm, all three indices are solid plus for the day. Stocks such as chemical company Dow, machine supplier Caterpillar and airline Boeing are leading the rise in the Dow Jones index.

The increase came after Powell kept interest rates calm and adjusted growth estimates for the US economy. In addition, he indicated that “in the next few days” he will announce something related to the capital adequacy of the banks (supplementary leverage ratio, or SLR).

This could potentially mean an extension of a waiver from May last year that will strengthen banks’ ability to lend money. This exception expires according to plan March 31 this year.

The exemption allows banks to exempt, among other things, government bonds from the capital adequacy calculation, allowing them to lend more.

Better prospects for the economy

At the press conference, Powell says, among other things, that the economic situation will continue to depend on the development of the spread of the coronavirus, but that it looks brighter.

“The economy has recovered faster than expected,” Powell said.

Therefore, the Fed has adjusted its growth prospects for the US economy.

– The bank rises quite significantly in growth estimates this year, to 6.5 percent this year and 3.3 percent next, says Magnussen.

In December, the central bank expected growth of 4.4% this year and 3.2% next.

Expect further price growth

– They also believe that core inflation will rise by 2.2 percent this year, which is higher than the previous estimate of 1.8 percent. This means they believe the economy will improve, says Magnussen.

Powell emphasizes that although inflation may be above the two percent inflation target for a period, he believes it will be temporary.

537,000 Americans have so far died in the pandemic. At the same time, vaccination has accelerated and nearly 12 percent of the population is now fully vaccinated, according to VG’s summary.

The US economy is also likely to receive strong support from government stimulus. This week, the US government began distributing several billion crowns in direct support of the crown to the population.

The OECD expects the US economy to grow 6.5 percent this year. Bloomberg has compiled estimates from analysts who assume an average growth of 5.5 percent this year and four percent in 2022.

Looking for signs

In the aftermath of the crown crisis, several central banks have slashed interest rates to stimulate the economy, including both the Federal Reserve and our own Norges Bank.

Markets are looking for signs of what will happen to interest rates and backing purchases of fixed income securities when the crown crisis subsides. So far, there have been few signs that any interest rate hike is on the way right away.

After the press conference, Magnussen says the Fed chief hasn’t changed his tune since the last interest rate meeting.

– You stick to the message and guidance you have had for a while. Before there is talk of raising interest rates, inflation must rise, and it must also be above target for some time. The increase coming this year believes the Fed is temporary, says Magnussen.

The significant yield on 10-year US government bonds has tripled from a low of 0.5 percent last year, but remains low compared to the level of the past 10 years.

Magnussen expected in advance that Powell would say something about the increase in interest rates on long-term US government bonds.

– He was asked a specific question about it, but then he says, as he usually does, that they not only look at a single interest rate, but they look at financial conditions, such as volatility in the stock markets and spreads in the equity markets. fixed rent. . These conditions are good so far and support the growth of the economy, says Magnussen.

It has paid out 2,000 billion.

On the same day as the monetary policy meeting, the United States Department of the Treasury announces that the country’s authorities have distributed crown support to the population of up to 242 billion dollars (2 billion crowns) this week.

This spans more than 90 million payments and comes as a result of Congress recently passing a stimulus package totaling $ 1.9 billion.

The Congressional Budget Office (CBO) expects US debt to increase significantly in the coming decades, due in part to an aging population and underfunded benefit schemes. This makes the country vulnerable to any increase in interest rates.

The major yield on 10-year US government bonds is 1.66% on Wednesday, having fallen to 0.5% in the wake of the crown crisis and last year’s closings. .

In the last ten years, the “ten-year-old” interest rate has generally ranged from 1.5 to 3 percent. A rising interest rate on government bonds will typically make them more attractive to investors, while stocks that are assumed to have higher risk may become less attractive.