Mixed feelings on interest rate decision Fed

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At the Jackson Hole conference for central banks three weeks ago, the US central bank announced a new strategy. President Jerome Powell said that, from now on, employment will take precedence over stable price levels. From now on, inflation should be allowed to rise a little above the 2% target if that will help to increase employment. This would allow interest rates to remain low for a longer period of time. Over the last two days, the Fed’s policy committee held its first regular policy meeting since this revelation. Investors looked forward to it. This was the first opportunity for the Fed to quantify the new strategy. So how long will interest rates remain low?

The answer came yesterday evening. The Federal Reserve does not expect to raise interest rates for the first three years. This means that US short-term interest rates will remain close to 0% at least until 2023. The financial markets appeared to be satisfied with this statement, given the rising share prices. This was also because the Fed indicated that it would continue to buy up at least USD 120 billion a month to support the economy. However, later during the press conference, prices dropped again, with the technology funds at the forefront. The Dow closed slightly in the plus, but the NASDAQ closed 1.5% lower. The S&P500 also closed lower. This was because Powell indicated that much more budgetary support will be needed to combat the effects of the coronary pandemic. He also expects that it will take time for the economy to recover.

Nevertheless, the US Central Bank is more positive about the economy than it was a few months ago. At that time, the economy was expected to shrink by 5.5% to 7.6% by 2020, but only yesterday evening it was ‘only’ 3% to 4%. Employment also continues to develop better than expected. The Fed expects unemployment to fall to 7.6% in the fourth quarter. Earlier this was 9.3%. Unemployment will continue to fall to around 6% in 2021 and to a maximum of 5% in 2022. If this is the case, then it really will be time for an increase in interest rates.

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