“The world is not enough” already knew super agent James Bond in the late 1990s. The title of the Hollywood flick could also be transferred to the financial markets these days.
The US Federal Reserve announced that it would keep interest rates in the United States at zero until the end of 2023 – and yet the markets are dissatisfied with this monetary policy decision. The world of zero interest rates really doesn’t seem enough to them.
Because while Fed Chairman Jerome Powell was still answering journalists’ questions, the S&P 500 stock index turned negative. Technology stocks in particular plummeted. The Nasdaq index went out of trading with a loss of more than one percent.
“The Fed meeting was a slight disappointment for the markets. The monetary authorities had no new monetary policy impulses up their sleeves, ”said Ebrahim Rahbari, strategist at the major American bank Citi.
Inflation recently well below two percent
The Fed’s promise to intervene in an emergency – the so-called Fed put – will continue, he judged. However, it was not further fed with money, although the financial markets had expected exactly that in advance.
The market reaction reveals the high expectations placed on central bankers. Just two weeks ago Powell presented the Fed’s new inflation target.
This stipulates that the central bank will handle the inflation rate more flexibly than before and therefore no longer aim as a point target of two percent, but rather as a long-term average.
Since inflation was well below two percent in recent years, this had fueled the expectation in the markets that the Fed will not only keep its interest rates low for longer, but that it may take further measures at this meeting to raise prices float.
Financial markets were deterred
But the Fed only delivered on interest rates. The monetary authorities forecast that there will be no rate hikes until at least the end of 2023, and they point out that monetary policy will not be tightened until inflation is above two percent “for some time”. The new inflation target is now officially codified in the goals of the US monetary authorities.
In addition, some market participants had also expected that the Fed would increase its current bond purchases in view of the persistently low US inflation and, in particular, buy paper with longer maturities. But that is exactly what the Fed didn’t do, and Powell didn’t really care about that either.
The new strategic framework was “effective”, said the Fed chief when asked. The Council was convinced that interest rates would stimulate the economy for a very long time.
However, despite such reassuring words, the financial markets were rather deterred. “The stockbrokers have realized that the Fed has not gone as far as expected. All stock gains for the day were gone, ”observed Andrew Brenner of NatAlliance Securities.
Disagreement within the responsible body
The Fed’s decision is particularly explosive because this was the last monetary policy meeting before the upcoming US presidential election.
The Fed, which repeatedly prides itself on its political independence, obviously did not want to be suspected of supporting either candidate. The incumbent President Donald Trump had repeatedly stylized the stock markets as the yardstick for his success.
After all, the monetary authorities raised their economic forecasts for the current year significantly. You are only expecting a minus of 3.7 percent. In July, the Fed economists had expected an economic slump of 6.5 percent. The Fed also significantly raised its expectations for the unemployment rate and is now forecasting a rate of 7.6 percent compared to the previous year.
The dollar custodians were obviously not entirely in agreement about the current rate. Two members from the ten-member FOMC Council (Federal Open Market Committee) voted against the decision, albeit for different reasons.
While the President of the Dallas Fed Robert Kaplan did not want the new inflation target anchored in the monetary policy strategy, the President of the Minneapolis Fed, Neel Kashkari, advocated a more detailed definition of the inflation target.
The bond markets were also disgruntled that Powell was not announcing a new flood of money. Long-term bond yields in particular rose significantly. The zero interest world until 2023 is obviously not enough for bond investors either.