The Fed leaves its key rate unchanged and doubles the pace of the decline in its asset purchases from mid-January
The US Federal Reserve announced on Wednesday that the FOMC had agreed to leave the target range for federal funds unchanged at 0.0-0.25%, in line with expectations. Additionally, the rate of reduction in the bank’s bond purchase program will be doubled from mid-January to $ 30 billion per month, with a similar rate of reduction likely appropriate in the following months, although that the rate of reduction can be adjusted if necessary. by a change in economic conditions. If the Fed cuts its bond purchases by $ 30 billion per month until the program fully unwinds, net asset purchases will drop to zero by the end of March 2022.
- The Fed left interest rates unchanged at 0.0-0.25% and doubled the pace of the QE cut in January, as expected.
- The bank’s new dot plot showed Fed members expect three rate hikes in 2022, more hawkish than some had expected.
- As a result, the US dollar was supported and the DXY index climbed to 97.00.
According to the new dot plot, the median view of the Fed Funds rate at the end of 2022 has been raised to 0.9% (indicating that three rate hikes are expected in 2022) from 0.3%. The median view of the Fed Funds rate at the end of 2023 was raised to 1.6% from 1.0% and at the end of 2024 to 2.1% from 1.8%. The Fed’s view on the long-term interest rate position remained unchanged at 2.5%. Five of the 18 members of the Fed are forecasting a key rate of 2.5% or more by the end of 2024.
In its statement on monetary policy, the Fed said that, with inflation having exceeded 2.0% for some time, it expects it to be appropriate to keep interest rates at current levels until. ” labor market conditions reach levels compatible with full employment. The Fed added that supply and demand imbalances linked to the pandemic and the economic reopening continue to contribute to high levels of inflation and that risks to the economic outlook remain, including new variants of Covid-19. Job creation has been solid in recent months, the Fed said, and the unemployment rate has fallen significantly, although the sectors worst affected by the pandemic have improved in recent months, while continuing to be affected. by the pandemic.
The Fed has also released new economic forecasts, according to which the Core PCE will average 2.7% in 2022, down from 2.3% in the last forecast, before falling back to 2.3% in 2023 and then to 2, 1% in 2024. The GDP growth forecast for 2022 has been revised slightly upwards to 4.0% from 3.8%, and remained unchanged at 2.2% for 2023 and 2.0% for 2024. Long-term growth forecast remained unchanged at 1.8%.
The US dollar index (DXY) initially climbed higher from 96.60 to 96.90 in response to the Fed’s policy announcement, but has since fallen back to the 96.70 area. USD / JPY broke through the 1.1400 mark, bringing it to new one-month highs. EUR / USD fell sharply below 1.1250 and to new one-month lows in 1.1220.
the dot plot appears to have been a bit more hawkish than expected, with three rate hikes indicated in 2022 (some market participants expected the Fed to signal two hikes in 2022). As traders continue to digest the announcement, the forex market is now focused on the post-meeting press conference with Fed Chairman Jerome Powell, which will begin at 2:30 p.m. EST.
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