#OPINIONLEADER# #FedInterestRateDecision#
AUG 5, 2021
The U.S. Federal Reserve held its monetary policy unchanged as widely expected during their meeting last Thursday. However, the central bank delivered an impression that quantitative easing (QE) tapering is getting closer.
Optimistic tone on economic recovery.
The Fed has made considerable changes to its monetary policy statement this time round. First off, the central bank acknowledged the ongoing economic recovery, stating in the statement that “indicators of economic activity and employment have continued to strengthen” since its previous meeting. Next, the Fed has dropped the words “remain weak” in the statement when highlighting the improvement shown in the business sectors that are most adversely affected by the pandemic.
Probably the most significant of all changes, the sentence “since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings” has been added into the statement. This refers to the progress made towards the central bank’s dual mandate of maximum employment and price stability when it decided last December to continue QE at $120 billion per month.
“Substantial further progress” needed.
Despite the optimistic outlook from the Fed, Chairman Jerome Powell warned during his press conference that the U.S economy is still a distance away from making “substantial further progress” towards the Fed’s goals. Specifically, the central bank wants to see substantial progress being made towards maximum employment and price stability.
As of the latest jobs report, the job market is still falling short by 6.35 million jobs from the pre-pandemic level. Although inflation has been running hot in recent months, the Fed continues to stick with the view that the rise in prices reflects transitory factors. Furthermore, Powell expects inflation to remain above target in the upcoming months but deemed inadequate for a change in policy stance.
Delta variant poses uncertainty? Fear not, says Powell.
The COVID Delta variant has raised the level of uncertainty in the global economic recovery. This highly contagious variant has led to a spike in the number of COVID cases around the world. Despite so, Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, said recently that he does not expect lockdown measures to return to the U.S. as the country is unlikely going to face the same dire situation as last year.
During his press conference, Powell also downplayed the impact the Delta variant has on the U.S. economic recovery. He said that with “successive waves of Covid over the past year and some months now, there has tended to be less in the way of economic implications from each wave”. Powell’s view can be justified by the ongoing efficient vaccination programmes and the better handling of situation in the U.S. whenever a spike in cases happens.
If the COVID situation in the U.S. were to turn out as expected by Fauci and Powell, we may be seeing further progress in the country’s economic recovery.
Meeting’s impact on the U.S. dollar.
Overall, the optimism sparked by the Fed led to the adoption of a risk-on sentiment by the market. As a result, the demand for safe haven assets like the U.S. dollar declined, leading to the weakening of the U.S. dollar against other major currencies. The increase in risk appetite also led to a rise in the stock market. As shown in the chart below, the three major indices rallied upon the announcement from the Fed.
The next major event.
The Fed will be taking a break in August and will meet again for a monetary policy decision in September. Nonetheless, the annual Jackson Hole Symposium will be held from 26-28 August. Without having to wait for the September’s policy meeting, there has been speculations that the central bank will be dropping a hint on QE tapering before formalizing its plan in the next meeting. Afterall, the Fed is known for dropping major policy hints during the annual symposium.
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