Taper statements do not cause stress yet
Last week, investor interest was focused on the publication of the minutes of the policy meetings of both the US and European central banks. Last Wednesday, it was the turn of the Federal Reserve.
The minutes related to the meeting on 15 and 16 June. Monetary policy is aimed at creating maximum employment and anchoring annual inflation around 2 percent for an extended period.
The US economy is starting to pick up steam as a result of the successful vaccination campaign. The Fed will continue to maintain a loose monetary policy until the targets are met. The difference with the previous meeting is that now some governors expect the targets to be reached sooner. This was reflected in the adjustments to the so-called dot plot (future expected interest rate changes). The inflation forecast for 2023 was raised slightly to 2.2 percent, meaning that two interest rate hikes are expected in 2023. Previously, the Fed had assumed that the first rate increase would not take place until 2024.
During the last meeting, the governors considered it too early to adjust the broad monetary policy. However, they did agree that it was important to plan the phasing out of the purchase programme carefully. The upcoming policy meeting on 27 and 28 July will provide more clarity on how the programme will be phased out (so-called taper conditions).
In the past, investors have reacted nervously to taper statements by central banks. For now, it seems that bond investors, in particular, remain calm. Yesterday, the US ten-year yield fell to 1.246 percent during the trading day and thus reached its lowest level since 18 February. Investors assume that the rapidly rising inflation will lead to a slowdown in economic growth in the short term.
This week, the European Central Bank finalised the evaluation of the monetary policy after one and a half years. The most important policy change is the adjustment of the inflation target. The old inflation target was below, but close to 2 percent. From now on, the target will be 2%, but there is also room for temporarily higher inflation if that proves necessary to promote economic recovery. The ECB’s new strategy creates more policy space in line with its US counterpart. In contrast to the Fed, the ECB is not yet openly discussing the possibility of winding down its purchase programme.
The expectation that the Fed will start to wind down the purchase programme sooner than the ECB is reflected in the value development of the dollar against the euro. Last month, the dollar appreciated by around 3%.