Fed's open-ended strategy in monetary expansion to continue for a long time

We have left behind the Fed statements everyone expected. The policy statement does not reveal a positive picture of the economy, as expected, and this is also reflected in the expectations of FOMC members.

We have left behind the Fed statements everyone expected. The policy statement does not reveal a positive picture of the economy, as expected, and this is also reflected in the expectations of FOMC members. The dot plot, which should not have much meaning, that is, naturally unable to reveal the expectation of an interest rate increase, shows that no interest rate increase is foreseen until 2022. Even if no negative interest is applied, life will continue with the existing interest rates for a long time. In terms of asset purchases, there is no limit, we can even say that the current levels are lower limits. As a matter of fact, FOMC has found its place in the policy statement that asset purchases will continue at the “at least” current levels. If the Fed is going to expand the scope of monetary expansion, when the long side of the bond yield curve gets steeper, it will necessarily focus on purchasing in those maturities.

Of course, Powell has responded to the control of the yield curve, which we have been dealing with for days here. Fed, maybe will not do anything about it at the moment, but the issue of the steepness of the curve is important and this can be evaluated seriously in the next meetings. The Fed is now trying to understand the economy better, and if the curve does gets steeper even if the desired recovery is not achieved, then the Fed will have to control the related maturities in order not to move away from the target low interest rates.

One of the dovish details of the Fed's statement is that several recently recovered data (which non-farm payrolls data seemed as positive largely due to surveys or methodologies) have not been subject to policy disclosures. Even if it was already mentioned in the policy statement, they could not be an indication of the direction of the Fed's monetary policy. We are at a very early point to talk about economic recovery, we have not left behind the dangers of recession and deflation.

Economic projections have been updated according to pandemic conditions. The economy is expected to grow 5% in 2021 and 3.5% in 2022 after ending 2020 with a contraction of 6.5%. The trend of inflation seems to indicate that the risk of deflation is not in vain, members are expecting 0.8% in PCE and 1% in core PCE for 2020. The core PCE is expected to be 1.5% and 1.7%, respectively, in the following years. Until 2022, if inflation remains below expectations, the possibility of lower levels is considerably high, the Fed will remain in defense. The dynamics of the labor market also have a long way to reach the pre-Covid-19 period in the scope of the unemployment rate estimation of 9.3%, 6.5% and 5.5% for 2020, 2021 and 2022 respectively. Even if there is a return to work, too many of the former labor force will remain idle.

Source: Tera Menkul
Hibya News Agency
 

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