Fed Maintains Target range at 0 to 0.25%

Summary of Fed Meeting:

  • The path of the economy will depend significantly on the course of the virus.
  • Seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.
  • Will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.
  • To keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.
  • The Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month
  • The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals

Source: http://www.federalreserve.gov/newsevents/pressreleases/monetary20210616a.htm

Economic projections illustrated in June 16th Meeting show an upward revision in 2021 projections, most notably on the Core PCE inflation, where it broke the upper bound range of 2.5% after hitting 3.8% on June 10th. The new projections range between 2.7% and 3.3% (still exceeding the upper bound with the new projections). July’s reading is anticipated to be around 4.3%. Additionally, economic growth and PCE inflation range projections have also been revised upwards (6.5% to 7% and 2.4% to 3.4% respectively). Uemployment rate maintained the same median of 4.5% for 2021 with a tighter range from 4.2% to 5%.

With Powell recognizing the inflation pressure, the Fed funds rate in 2023 have been revised upwards from March projection of 0.1% to June projection of 0.6% with range possibility of 0.1% to 1.6%. This recognition implies concerns within the committee that the economy might be overheating, slightly backtracking on claims that the recent inflation uptrend is solely attributed to commodities and therefore temporary.

Table 1 : June 16th Meeting , Source : http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20210616.pdf

The above resulted with the USD reaching a 6-week high (DXY at 91.13) and EURUSD hitting 1.20. US 10 year yield spiked by 8bps to 1.58% as fears of inflation not being temporary set in. US equity markets reacted slightly downwards with the S&P500 dropping to $4,224 with consumer staples and utilities being the most hard hit.

image source : http://www.ft.com

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