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The Fed chooses its side in the inflation debate and sends the market a message – no interest rate hikes for years



Jerome Powell, President of the US Federal Reserve, speaks at a press conference following a Federal Open Market Committee (FOMC) meeting in Washington, January 29, 2020.

Andrew Harrer | Bloomberg | Getty Images

The Fed does not expect inflation to rise for years, and it is willing to keep interest rates at zero, even after doing so.

The stock initially rose after the Fed released its post-meeting statement and its latest economic forecast, showing it will keep interest rates at least through 2023, as expected. Equities gave up their gains when Fed Chairman Jerome Powell briefed the media, describing the Fed̵

7;s guidance as strong and “powerful”.

“He’s the big, powerful Oz. Investors were fooled. They thought improved guidance going forward meant something, but when they looked behind the curtain, they realized the Fed was doing nothing and the market was rolling over,” said Michael Arone, chief investment officer. . strategist at State Street Global Advisors.

Treasury interest rates moved slightly higher after Powell said the Fed plans to keep its asset purchases at current levels for now. Some bond market participants have expected the Fed to increase government purchases, and Powell did not commit to that. The 10-year government return rose to 0.695%.

“We will continue to monitor developments and we are ready to adjust our plans as needed,” Powell said.

But it was the Fed’s guidance that the markets found deaf. In the Fed’s latest projections, core inflation is expected to remain low and not reach the Fed’s target of 2% by 2023. At the same time, the labor market is expected to improve to a point where unemployment is at 4% in 2023, at a longer rate of 4.1%.

“This is dovish – lower interest rates for longer, higher stocks, weaker dollars,” said Jon Hill, senior fixed income strategist at BMO. “The Fed says we are not hiking in 2023, maybe in 2024 … What they are saying is that that is our goal. We expect to have just barely met them, and even then they are not raising rates.”

The Fed announced last month a change in its policy, where it will now let inflation run above its target for some time before moving to raise interest rates. But in the key trend in Fed forecasts, the Fed sees core inflation running below 2% through 2022. It expects core PCE inflation of 1.3% to 1.5% this year and 1.6% to 1.8% next year. The pace will reach 1.9% to 2% by 2023.

But AB economist Eric Winograd said Powell may have signed the deaf message he sent.

“He noted that targeting an inflation overrun for ‘a while’ as the statement says means they are not targeting a ‘sustained’ overrun. So how long is ‘some time’ if it is not maintained?”, Winograd said. . “This inaccuracy is a problem that the committee will have to solve to reap the full benefits of the change of framework. It is no coincidence that the stock market, which had been in a positive area, turned negative after the chairman’s comments.”

Powell said the Fed expects inflation to improve eventually.

“It is very strong forward-looking guidance and we believe it will be sustainable guidance that will provide significant support to the economy,” he said.

While some Wall Street strategists and investors believe inflation could become an issue, the Fed has said it is more concerned about disinflation.


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