Powell’s comment sent yield on the 10-year Treasury bond tumbling and helped US equities to recover from deep red to green. The US indices ended in the green, while the US dollar slumped over 0.5 per cent.
Prior to Wednesday’s monetary policy statement by the US Federal Reserve, investors had started to factor in the possibility of the central bank lifting interest rates earlier than expected, as evidence pointed at a swashbuckling next few quarters for the US economy. largely due to an acceleration in Covid-19 vaccination drive since January.
The Fed was having none of it, as it decided to hold interest rates steady and said it expects any uptick inflation in the coming months to be largely transitory.
For those who like to dig deeper into the words of the central bank, there were three major takeaways from the Fed’s statement and Jerome Powell’s press conference.
Don’t assume tapering till we say so’
The rate-setting panel of the US Fed stuck to its earlier stance of no hike in interest rates till the end of 2023. While the dot plot showed that more members of the FOMC expected a rate hike as early as 2022, the median of the forecast still remained at zero hike till 2023. Jerome Powell said the Fed will guide the market well in advance if it were to taper its bond purchases. “Until we give a signal (on tapering), market should assume we are not there yet,” Powell said.
Fed does not care for your forecasts
Much of the brouhaha in the global markets over timing Fed’s taper tantrum and rate hikes has been premised on economists’ expectation of rip-roaring growth in the US and global economy in the coming quarters, which may recede the need for Fed’s extraordinary easy monetary policy. Yet, Powell’s message is clear: the Fed will not move only on the basis of forecasts, and will instead wait for actual data to show that the economy is returning to pre-Covid-19 normal.
Powell lays down criteria for lift-off
In what can be seen an objective-based forward guidance, Powell laid down three criteria that will determine if and when the Fed will lift interest rate. Powell said the central bank will wait to robust labour market conditions, a move above 2 per cent on consumer inflation and evidence that inflation will sustain over 2 per cent for a substantial period.
While only time will tell how seriously investors will take Powell’s words and if they will raise concerns over Fed’s credibility, for now the outcome and the commentary from the Fed’s rate-setting meeting should raise the spirits of the bulls on Dalal Street.
