“This is not what the markets expected. The Fed is indicating that rates will need to be raised faster and sooner, with the outlook of two hikes in 2023. This shift somewhat clashes with the Fed’s recent assumption that the recent rise in inflation was of a temporary “. Thus James McCann, deputy chief economist of Aberdeen Standard Investments, comments on the roundup of announcements released yesterday by the FOMC – the monetary policy arm of the Fed – and the statements coming directly from the number one of the central bank, Jerome Powell.
The latest dot plot released by the Federal Reserve is more than indicative of the institute’s change of course. The dot plot is that document in which every quarter the members of the Fed indicate what will be the levels that, in their opinion, the US interest rates will test in the short, medium and long term; yesterday, its new version arrived, decidedly updated compared to the last one in March, which showed that Powell & Co did not expect a rate hike before 2024. And instead the newly baked dot plot indicates that the expectations of the central bank are, on average, two rate hikes in 2023 (fed funds rates currently fluctuate in the range between zero and 0.25%, level confirmed yesterday).
On the other hand, the Fed has revised upward the estimates on inflation growth to + 3.4% this year, well above the + 2.4% expected in the previous outlook. Furthermore, the core component of inflation measured by the PCE (personal spending index) is now expected to grow by 3% in 2021, more than the + 2.2% expected in March; for 2022, the core PCE is expected to rise by + 2.1%.
Not only that: the Fed has also improved its outlook on US GDP growth from + 6.5% expected in March to + 7% for 2021. Expectations for real GDP growth in 2023 have also been revised upwards to -2. , 4%, compared to the previous outlook of a 2.2% expansion, while the estimates for 2022 – equal to a 3% GDP expansion – have been left unchanged. With regard to the US unemployment rate, forecasts for 2021 have remained of a decline to 4.5%. For 2022 and 2023 the estimates are 3.8% and 3.5% respectively. The outlook for 2022 was thus improved, the year for which the Fed had forecast a limited decline of 3.9% in March.
That said, it was Jerome Powell himself who advised traders and investors not to take literally what is written in the dot plot: during the press conference following the announcement of the rates, the banker wanted to specify, in fact, that tapering QE is not forthcoming and that the dot plot forecasts of two rate hikes in 2023 must be taken “cum fiore salis”.
Not for nothing, despite the decline, Wall Street did not panic. Admittedly, Powell could not deny the undeniable: “Inflation has risen dramatically and will remain high, explaining the” upward pressures on prices, with the resumption of spending “and adding that” there is a possibility that inflationary pressures are persistent “. For this reason, he continued, “if we saw signs of inflation that was persistently moving above the target, we would be ready to adjust the position of monetary policy”.
The Fed helmsman also pointed out that “household spending is growing at a fast pace”, that “corporate investment is increasing at a solid pace” and that “the factors weighing on employment growth should dampen in the next months”. In short, “the indicators relating to economic activity and employment will continue to improve”.
In a comment reported by Cnbc Willem Sels, head of investments in the private banking and wealth management division at HSBC, commented on the news that emerged from the Fed, underlining that the surprise was not huge, but that in any case there was a change of direction. . “This is not a huge surprise, although the tone is a little more hawkish than many economists expected, as median dot plot estimates show two narrow by 2023.” In any case, “before the meeting, the markets were already pricing in a good chance of a rate hike in 2022 and several hikes in 2023”. As a result, “the market has already begun to anticipate a change in the future direction of interest rates, which should limit the impact of the news, although the immediate market reaction was a moderate hike in Treasury rates and a drop in equities, due to that more hawkish tone ”. Sels added that the main uncertainty in the markets remains when the Fed will begin to reduce the asset purchases it makes under the QE plan, which have caused its balance sheet to swell beyond $ 8 trillion.
The Fed’s most hawkish stance was also discounted by the forex market in any case: the dollar rose to a record in two months, causing the pound to fall below the $ 1.40 threshold for the first time in more than five. weeks. Most notably, the Dollar Index rose to an eight-week high of 91.445 in trading in the Asia-Pacific markets. Focus on the euro, which in these hours loses 0.36%, also piercing the $ 1.20 share. The greenback climbed to $ 1.1984 against the euro, extending the roughly 1% rise it had earned in the eve of the session. The dollar also strengthened against the yen to JPY 110.825, a record since April 1st. However, it must be said that Powell yesterday tried to reassure the markets by stating that “the rate hike will take place well into the future” and that, in any case, “we are very far from full employment, and this will be a consideration to make. “. Powell also attacked in some way the credibility of the dot plot, stating that the points do not have a great predictive value on the movement of rates, and that precisely for this reason they must be taken with grain. And also on inflation: “we expect these high inflation data to fade away”. In fact, if it is true that for this year the Fed expects an increase in inflation equal to + 3.4%, for 2022 the estimate is a trend of growth that, over a longer period of time , slows down to + 2%; in line with the central bank’s goal. However, some sentences were not entirely clear, evidently leaving Powell a margin to turn around in case of errors in the assessment of the economy. In the case of the Fed’s QE tapering (asset purchases worth $ 120 billion per month), the comment basically took the form of a play on words: “You can think of this meeting as the one where we talked about the possibility of talk about it, ”Powell said, in a phrase that seemed to be a continuation of the one he uttered last year, when he said the Fed“ wasn’t even thinking about thinking about raising rates ”. The five-year US Treasury rates thus rose up to +10 basis points to 0.88% at the same time as Jerome Powell’s speech; 10-year Treasury rates jumped to 1.575%, while 30-year rates remained barely moved around 2.193%.