Fed starts winding down corona program
Nothing is more palatable to investors than a central bank that does what it communicates. After the announcement of the decisions of the FOMC, the policy committee of the Fed, the U.S. markets rose last night to new closing record levels. The Fed announced that it will leave interest rates unchanged and that it will start phasing out the support program it launched last year to steer the financial markets through the corona crisis. The economy is now strong enough to stand on its own two feet. Of the 120 billion dollars in government and mortgage bonds (treasuries and mortgage-backed securities) that the Fed is currently buying, 15 billion dollars less will be bought each month. In Anglo-Saxon countries, this tapering is called “tapering. There will be $10 billion less in treasuries bought per month and $5 billion less in MBS. If conditions remain as they are now, the entire support program will be phased out by the summer of 2022. During a press conference about the decision, Fed Chairman Jerome Powell indicated that interest rates would not immediately rise after that. ‘For that, the bar is higher,’ Powell said. He also said that during the meeting, policymakers had not discussed raising interest rates.
Powell reiterated during the press conference that the Fed still believes that rising inflation is temporary. At least, “largely,” which is a new addition to the view. U.S. inflation came in at 5.4 percent (annualized) in September, while the Fed’s target is around 2 percent. Once the economy is fully open again and the logistical disruptions are resolved, the Fed believes inflation will start to fall back to around 2 percent. Powell does not yet see second-round effects (wage increases); currently, wage increases are still in line with inflation.
As mentioned, the financial markets were happy with the expected decision. There was no impact on the interest rate market, neither on the 10-year nor on the 2-year yield. The dollar did fall, but only temporarily. This morning in Asia and Europe, the stock markets were enthusiastically in the green. Tech stocks, in particular, were in demand.
