The Fed meets analysts’ expectations
Yesterday, the Fed came out with a fresh interest rate decision. Chairman Jerome Powell and his staff fully met the expectations of analysts with the decision. The Fed created clarity and that is what investors like. It gives them peace of mind. Following the Fed’s announcements last night, U.S. stock markets recovered further from the dips earlier this week. U.S. interest rates rose very slightly, which was also true for the dollar.
Also in the United States, the support program is being phased out
The federal funds rate and the discount rate remained unchanged. However, according to the Fed, sufficient progress has been made towards the goals of inflation and maximum employment. Therefore, it is justified to slowly end the support program that was rigged to help America through the corona crisis (“tapering”). In his explanation of the decision, Powell said that during the next meeting on November 2 and 3, the final decision to phase out the program could be taken, and the tapering could begin immediately. But of course only under the condition that the economy continues to recover and that corona does not cause any further obstacles. The Fed will then take its time until mid-2022 to completely phase out the support program. When the previous support program was phased out in 2014, the Fed took 10 months to do so. Whether interest rates will go up after that is an entirely different matter, according to Powell. The necessary uncertainty, therefore, persisted about when a possible interest rate increase would take place. Some guidance can be found in the “dot plot” with the individual expectations of the various central bankers. From this dot plot, it can be deduced that half of the policymakers expect a first interest rate increase in 2022, the other half does not see this happening until 2023.
New growth forecasts
In addition to the interest rate decision, the Fed also released new growth forecasts for the U.S. economy. The expectation for this year is slightly lower, going from 7.0 percent previously to 5.9 percent now. For 2022, the growth forecast was raised from 3.3 percent to 3.8 percent. Inflation expectations were also revised up. In June, the Fed was still expecting an inflation rate of 3.4 percent for this year, now this expectation was revised upward to 4.2 percent. In 2022, inflation will fall again to just above 2 percent.
German research institute assumes weaker recovery of the German economy
The Munich-based economic research institute IFO believes that the German economy will recover less strongly than previously assumed. Whereas in June it was still assumed that the German economy would grow by 3.3 percent this year, it is now only expected to grow by 2.5 percent. The German economy would like to recover more strongly, but is being held back by industry, which is facing a serious shortage of semifinished products. As is well known by now, semiconductors are the most frequently mentioned. However, the shortages are temporary, according to the IFO. Therefore, the German economy will grow more strongly in 2022 than previously assumed. The expectation was raised from 4.3 percent to 5.1 percent. Today’s release of the German purchasing managers’ index confirms IFO’s view of the current year. The composite index for services and industry fell from 62.6 to 58.5 in September. Economists’ expectations were at 61.5. The fact that the index shows a number above 50 means that the economy is still growing, but less vigorously than was assumed.