D.As expected, the US Federal Reserve (Fed) has not touched key interest rates and is also sticking to its bond purchase program of $ 120 billion a month. She announced this after her two-day June meeting. As a result, the key interest rates for overnight loans between banks will remain in the range between 0 and 0.25 percent, as they have been since March 2020. Speculations that the Fed might prepare for a turnaround in monetary policy because of higher inflation in the United States have not been confirmed. The Fed’s preferred inflation indicator, PCE, is 4.8 percent annualized.
Despite this development, the Fed is sticking to its assessment and its choice of words, according to which the factors behind the inflation are temporary. This is also clear when looking at the so-called projections in which the central bankers put their forecasts on the labor market, growth, prices and key interest rates on record. As a result, the central bankers do not expect any key rate hikes this year or next, but two rate hikes in 2023.
The economy is growing faster than it has been in decades
This is a revision of the March forecast in which a steady hand was predicted even for 2023. Inflation expectations have also changed compared to the March projection: According to the forecast, the PCE will reach 3 percent this year, only to drop to 2.1 percent in the two following years without tightening monetary policy. For the rest of this year, however, this presupposes price reductions in important product groups in some cases.
Fed Chairman Powell, in line with his colleagues on the Board of Governors, sees little evidence that inflation expectations could jump out of their anchoring. He pointed out that current price jumps are due to special factors that have already evaporated: The dramatically increased wood prices are already falling significantly. He expects the same for used cars, which played an important role in recent inflationary developments.
The Fed bankers now expect economic growth of 7 percent instead of 6.5 percent for this year. According to Fed Chairman Jerome Powell, the economy is growing faster than it has been in decades. This has consequences for the American labor market. “We are clearly on the path to a very strong job market,” said Powell. He made it clear that the recently disappointing development is due to factors that are of a temporary nature.
At the moment, the federal government and states are providing unemployment benefits to around 15 million workers, which for many ends in the fall. You should feel encouraged to look for a job again. According to Powell, many people still stay home for fear of infection or because they cannot have childcare. With the vaccination advances and the opening of schools and kindergartens, the problem disappears. According to the Fed projections, the unemployment rate will fall from 4.5 percent in 2021 to 3.8 in the coming year and 3.5 percent in 2023.
Powell avoided giving any clues as to when the rapidly growing economy would make a turnaround in monetary policy necessary. They want to talk about it in one of the upcoming meetings. In order to decide when and whether, above all, the bond purchase program should be scaled down, more data is needed. Powell promised not to take such a decision into the markets unprepared. If the program is reduced, it will be in such a way that financial conditions remain loose and only when the economy is buzzing. Powell makes it clear that he wants with all his might to avoid a “taper tantrum” that had provoked his predecessor Ben Bernanke.