The FOMC Statement
- As the country faces off with the effects of the Covid 19 pandemic, all eyes have been on the Federal Open Markets Committee as they prepared to release a
statement in June.
- After their meeting that concluded on the 16th of June 2021, they issued a statement that greatly resembled the 28th of April 2021 announcement.
- They recognized that inflation was on the rise but expressed their confidence that this would soon come under control.
- The final agreement of the committee members was that interest rates would eventually surge upwards.
- Central banks dot-plot signaled two possible rate hikes in 2023
Following the June 15-16th meeting, the Federal Reserve decided to hold benchmark interest rates at close to zero to allow the economy to recover from the effects of the coronavirus pandemic. The Federal Reserve emphasized its commitment to stimulate economic growth while working towards achieving price stability and maximum employment. Feds intend to continue promoting credit flow towards households businesses through low-interest rates and expansion of U.S. treasury bills and mortgage-backed securities purchases.
The Committee, therefore, left interest rates unchanged at 0.00% to 0.25% and promised that this would hold as long as the maximum employment was not consistent with the Committee’s assessment of the labor market conditions and inflation was under 2%. The Federal Open Markets Committee will closely monitor the effects of any incoming information for the economic lookout. They would be ready to make necessary adjustments on their monetary policy decision if there will arise risks related to the Committee’s goals. In addition, the Fed will continue to expand its holdings of Treasury securities by pumping in at least $80 billion monthly and spend an extra $40 billion each month to purchase mortgage-backed securities.
Covid 19 Vaccination
Fed said that Covid 19 vaccinations had lowered the spread of the virus in the U.S. As the vaccination progress, Fed expects that the effects of Covid 19 will continue to die off, but warned that this does not take away the risks of the economic outlook.
The Fed has previously issued warnings since 2020 August that it would welcome higher inflation rates of up to slightly more than 2% since inflation has been too low. Fed’s gauge of inflation points that prices have gone up by about 3.1% in the past twelve months. While the Committee insisted that inflation was purely transitory, there are chances that part of this inflation increase may stay longer than foreseen. As a result, pressure on prices may ease, but wage inflation may last longer.
Fed looked optimistic on the short-term view of the economy, warned that it was not yet time for celebrations as the economy was not yet out of the danger zone. We expect that the Fed may start to taper asset purchases in the last quarter of 2021 if the current economic trends persist. Fed Chair insisted that they were going to put more pressure on the recovery of the labor market. While signaling possible future interest rate hikes, he assured that Fed would not be quick to introduce higher interest rates and that even when it happens, the monetary policy will remain accommodating. Central banks dot-plot signaled two possible rate hikes in 2023 but the chair, Jerome Powell warned that investors should not over rely on the dot-plot to make their predictions.
The FOMC made some technical changes, raising the repo to 0.05% and interest rates it pays on excess balances from 0.10% to 0.15%. While this minor tweak does not affect the interest rate target of 0.00% to 0.25%, it should help alleviate negative interest rates pressure in the short term. Moreover, considering that banks have been lending at almost zero margins, an increase in the interest the FOMC pays by five basis points should move the effective interest rates to practically 0.10% or more. The Fed also extended U.S. dollar liquidity swap lines for nine central banks from September 2021 to the 31st of December 2021.