Daily Market Recap - Too early to talk about tapering says Fed Jerome Powell

The Federal Reserve announced on Wednesday that it expects a clear acceleration of growth and inflation this year in the United States while repeating that it would maintain interest rates close to zero for several years.

The central bank now expects US gross domestic product (GDP) to grow by 6.5% this year - which would be the best performance since 1984 - and the unemployment rate to fall to 4.5%, compared with the 4.2% expansion and 5% unemployment rate it forecast in December.

At the same time, inflation is expected to rise above its target of 2 percent to 2.4 percent before easing in 2022.

The upward revision of economic forecasts did not fundamentally change the central bankers' expectations for interest rates: seven out of 18 central bankers now expect a rate hike in 2023, up from five in December, and another four believe that rates may have to be raised as early as next year, which none of them anticipated in the previous projections.

The new economic projections incorporate the improved health situation, the progress of the vaccination campaign, and the adoption by Congress since December of two stimulus packages worth some $2.8 trillion.

Fed Chairman Jerome Powell stressed in an online press conference that despite the improving outlook, the central bank has no intention of reducing its support for the economy, recalling that nearly 10 million Americans are still out of work and inflation remains below its 2% target.

“A large part of the committee does not expect a rate hike over the forecast horizon,” he said.

Jerome Powell also said that it was still too early to talk about “tapering”, i.e. a gradual reduction in bond purchases by the Fed, comments that immediately caused the markets to react, with equities moving up while yields on long-term Treasury bonds fell back.

“The combination of still-low yields, a very slow and gradual normalization of monetary policy, and an improving economic outlook remains a very favorable environment for risky assets,” commented Willem Sels, head of private banking and wealth management investments at HSBC.

The Fed's new projections and the statements of its chairman suggest that the central bank still intends to avoid a premature and exaggerated reaction to a rise in inflation. This is because the rise in prices expected in the coming months will be partly the aftermath of their fall at the start of the pandemic, a base effect that will fade afterward.

(Chart Source: WSJ 17.03.2021)

(Chart Source: Tradingview 17.03.2021)

The Fed's new projections and the statements of its chairman suggest that the central bank still intends to avoid a premature and exaggerated reaction to a rise in inflation. This is because the rise in prices expected in the coming months will be partly the aftermath of their fall at the start of the pandemic, a base effect that will fade afterward.

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.