OPINION
Market Rating Before FOMC MeetingJan 31
Fed Ditches ‘Transitory’ Tag on the Outlook, Paves Way for Rate Hike
The meeting of the Federal Open Market Committee (FOMC) dated December 14 – 15, was concluded yesterday at 21:00 (GMT+2).
Fed kept the federal funds rate in a target range of 0 to 1/4 percent and will conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $30 billion per day.
The Committee decided to begin reducing the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities.As a result, the total amount of asset purchases will be reduced to $ 60 billion.
"With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but continue to be affected by COVID-19." Also 'transitory' removed from the inflation outlook.
"The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus," the statement suggested.
Meanwhile, in the Economic Projections Report, the Committee members' expectation of gross domestic product (GDP) was revised from 5.9 to 5.5 percent for this year and from 3.8 to 4.0 percent for 2022, while it was maintained at 1.8 percent for the long term.
In the report, the PCE inflation expectation increased from 4.2 to 5.3 percent for 2021 and from 2.2 percent to 2.6 percent for 2022, while remaining stable at 2.0 percent for the long term. The average rate projection of the members, on the other hand, was unchanged at 0.1 percent for 2021, yet it increased from 0.3 percent to 0.9 percent in 2022. The long-term rate projection was also unchanged at 2.5 percent.
"Economic activity is on track to expand at a robust pace this year, reflecting progress on vaccinations and the reopening of the economy. Aggregate demand remains very strong, buoyed by fiscal and monetary policy support and the healthy financial positions of households and businesses. The rise in COVID cases in recent weeks, along with the emergence of the Omicron variant, pose risks to the outlook," Chair Powell said in the Opening Statement.
"Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. In particular, bottlenecks and supply constraints are limiting how quickly production can respond to higher demand in the near term... As a result, overall inflation is running well above our 2 percent longer-run goal and will likely continue to do so well into next year," he also noted.
Noting that the economy has been making rapid progress toward maximum employment thanks to the improving labor market conditions and very strong demand for workers, Fed Chair stressed that they have no plans to raise rates before the reduction of asset purchases are completed.
FOMC remain prepared to adjust the pace of purchases if warranted by changes in the economic outlook, according to Powell. And even after the balance sheet stops expanding, their holdings of securities will continue to foster accommodative financial conditions.
Finally, he mentioned that stablecoins are not currently properly regulated and that cryptocurrencies are risky and not backed by anything.
Fed kept the federal funds rate in a target range of 0 to 1/4 percent and will conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $30 billion per day.
The Committee decided to begin reducing the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities.As a result, the total amount of asset purchases will be reduced to $ 60 billion.
"With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but continue to be affected by COVID-19." Also 'transitory' removed from the inflation outlook.
"The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus," the statement suggested.
Meanwhile, in the Economic Projections Report, the Committee members' expectation of gross domestic product (GDP) was revised from 5.9 to 5.5 percent for this year and from 3.8 to 4.0 percent for 2022, while it was maintained at 1.8 percent for the long term.
In the report, the PCE inflation expectation increased from 4.2 to 5.3 percent for 2021 and from 2.2 percent to 2.6 percent for 2022, while remaining stable at 2.0 percent for the long term. The average rate projection of the members, on the other hand, was unchanged at 0.1 percent for 2021, yet it increased from 0.3 percent to 0.9 percent in 2022. The long-term rate projection was also unchanged at 2.5 percent.
"Economic activity is on track to expand at a robust pace this year, reflecting progress on vaccinations and the reopening of the economy. Aggregate demand remains very strong, buoyed by fiscal and monetary policy support and the healthy financial positions of households and businesses. The rise in COVID cases in recent weeks, along with the emergence of the Omicron variant, pose risks to the outlook," Chair Powell said in the Opening Statement.
"Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. In particular, bottlenecks and supply constraints are limiting how quickly production can respond to higher demand in the near term... As a result, overall inflation is running well above our 2 percent longer-run goal and will likely continue to do so well into next year," he also noted.
Noting that the economy has been making rapid progress toward maximum employment thanks to the improving labor market conditions and very strong demand for workers, Fed Chair stressed that they have no plans to raise rates before the reduction of asset purchases are completed.
FOMC remain prepared to adjust the pace of purchases if warranted by changes in the economic outlook, according to Powell. And even after the balance sheet stops expanding, their holdings of securities will continue to foster accommodative financial conditions.
Finally, he mentioned that stablecoins are not currently properly regulated and that cryptocurrencies are risky and not backed by anything.
