Market expectations came true. In their meeting yesterday, Fed officials said the labor market and inflation rate were moving towards creating conditions to slow support for the US economy, despite the threat COVID-19 still poses. Hence, the central bank kept the target base interest rate range unchanged at 0-0.25% and revised the bond purchase program. Apparently, employment and inflation are gradually approaching the target levels, so the Federal Reserve will soon resort to adjusting programs to support the economy.
"The economy has made progress towards the targets, but the committee will continue to assess progress in upcoming meetings," the Federal Open Market Committee said. With regards to inflation, they pointed out that it has consistently dropped below 2% before, so there is no need to resort to a hawkish position. Instead, they announced two permanent buyback mechanisms, which will support financial markets in helping boost the economy.
But currently, there is a real boom in consumer prices, thanks to the lifting of quarantine restrictions and reopening of the economy. Both consumers and markets expect prices to rise over the next five years. Some officials also said they would like to start slowing inflation sooner rather than later, citing concerns about financial stability, including soaring house prices. They argued that the Fed should cut MBS purchases at a faster pace than Treasury bonds because the housing market no longer needs central bank support.
As before, the Fed is clear in its opinion that any steps to cut support would be based on progress towards employment and inflation. Significant gains have been made in the labor market over the past few months, with the unemployment rate falling below 6% as new jobs grew. Inflation is also currently well above the target 2.0%, but Fed officials believe the price spike is temporary and caused by shortages for certain categories of goods associated with the economic recovery.
Following the Fed's decision to keep interest rates unchanged, Jerome Powell, chairman of the committee provided his comments on the policy outlook. His assessments were more restrained than the official statement of the committee, which led to a market reversal and a sharp rise in risky assets. The Fed chief also reiterated that the Delta strain of coronavirus will have consequences for the health of the nation, but the recent waves of the pandemic have had less and less impact on the economy, which allows for more optimistic forecasts. The Delta strain will also allow for a significant reassessment of the labor market, so the Fed will monitor the situation more closely in the coming months. To be more specific, if the pace of economic recovery is maintained, and the labor market is not affected much by the coronavirus,
At the end of the press conference, Powell said that the Fed is monitoring inflation very closely, but now is not the time to think about raising interest rates.
It seems that the European Central Bank is set to remain flexible regarding their emergency bond purchase program. During his speech, ECB member Pablo Hernandez de Cos said that the main lesson to be learned from the current program is that it is necessary to shift purchases towards those sectors of the economy that need it most, which should significantly increase not only efficiency, but also the effectiveness of the program.
In short, the ECB will most likely keep its bond purchase program until March next year, and then continue to stimulate the economy with more flexible solutions. This moment is very important when EU authorities begin formal negotiations on how to shift their priorities in dealing with the crisis to achieve their inflation target. The bond purchase program has been an issue for some countries for quite a long time, especially in Germany who fear that it poses risks to financial stability.
De Cos said it is too early to say when to start discussing post-crisis measures, but noted that the ECB's decision last week is a sign that inflation-boosting changes are coming.
With regards to EUR/USD, a lot depends on 1.1865 because going above it will result in a jump towards 1.1880. But if pressure returns on the pair, price will plunge to 1.1840 and 1.1825.
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