Fed chooses to remain calm, gives "verbal guidance”

No regulations regarding asset purchases have been issued for the time being after the Fed's two-day meeting.

No regulations regarding asset purchases have been issued for the time being after the Fed's two-day meeting. Those waiting for action thought that the Fed might make a change in the maturity structure, but that seems to be left after the financial package. In the current situation, as the outlook for the economic outlook remains the same, further expansion of asset purchases may be in the future, as current levels should be "bottom" Fed should be in a position to put more action on the table when the projections deteriorate. However, there are vaccine and financial package elements that are not included in the equation and whose effects on the economy are still at the hypothetical stage, and the market is curious about their effects.

 

A meeting where the Fed was not even more dovish in terms of not adjusting QE. It is understood from the economic revisions that they are in a slightly more optimistic position compared to September. The economic contraction expectation for 2020 has been "improved" from 3.7% to 2.4%. For 2021, there is a revision from 4% to 4.2%. In terms of inflation, they expect to be below 2% in the next 2 years in the PCE indicator; While the 2020 estimate is left at 1.2%, there is a slight upward revision to 1.8% in 2021. 2% is foreseen in 2023, it is useful to remind that in order to reach 2% in average inflation, it is necessary to go above this for a certain period. There is a significant improvement in unemployment rate estimates; The 2020 estimate has been updated from 7.6% to 6.7%. Forecasts for 2021, 2022 and longer, respectively, "improved" towards 5%, 4.2% and 3.7%. The unemployment rate will apparently continue to decline, but will not decline at the pace since the worst of the pandemic ever. This is an indication that the employment market is predicted to be worse in the next 3 years than before the crisis. It will be necessary to include long-term unemployment in this equation.

 

If we come to the issue of interest; As seen in the projections, the prediction that "no interest rate hike until 2023" is maintained. The Fed will have plenty of time until it comes to the stage to consider this step. Perhaps if the vaccine and fiscal expansion allow us to have a "better" near term, the increasing monetary rotation may push the Fed to think of raising interest rates earlier. But there is time for this, because it is necessary to see the economy revive first. As we said before, first the health crisis and then the economic crisis will come out, and the exit from these two crises will not be simultaneously and at the same speed. The process of reducing the GBs and MBSs added to the balance sheet of the central bank, will be followed by an increase in interest rates.

 

 

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