The first meeting of the Fed ended yesterday at 20:00 (GMT+2) after Jerome Powell, Fed Chair, had conveyed the new approach adopted in monetary policy strategy at the Jackson Hole Economic Policy Symposium, which is quite prestigious in the field of economics and was held online this year due to the COVID-19. After two days of meeting, the Federal Open Market Committee (FOMC) announced no changes in interest rates in line with market expectations.

Despite opposition from Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari, the Federal Reserve kept its federal funding rate within the range of 0 to 0.25 percent by the votes of 8 members, and reiterated its commitment to increase Treasury bonds at a monthly level of $ 80 billion and commercial mortgage-based securities at a $ 40 billion in the coming months to support the flow of loans to consumers and businesses and keep the market running.

The minutes indicated that “The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved,” the minutes further noted.

What Powell Wants to Say

Speaking at the press conference held at 20:30 (GMT+2) after the decision of the Committee, Fed Chair Jerome Powell emphasized that the Federal Reserve made significant changes in its policy statement and promised that there would be no change in interest rates until inflation reached the target of 2.0 percent and remained moderate above this level.

Activity has increased in recent months, but it is low compared to pre-pandemic levels, Powell said, noting that household spending has recovered after a three-month decline and that there are signs of improvement in business investment.

Underlining the vital importance of ensuring that loans continue to flow, Powel said that financial incentives and financial support for improvement are needed to continue. He also stated that monetary policy will remain supportive until the recovery proceeds satisfactorily, adding that fiscal policy actions have made a critical difference so far and more fiscal stimulus will likely be required.

Noting that the labor market is far from maximum employment and they want to return to a strong labor market, Powell said that they are ready to make changes to asset purchases if they are deemed necessary, and that the scale of the SME loan program can be adjusted. “We’re not out of ammunition,” the Fed Chair further noted, recalling that there are still many policy tools the Fed can use.

No Change in Rates Expected Before 2023

Powell’s emphasis in the new monetary policy strategy to focus on strong employment markets raised the question in which direction the Fed will revise its projections at the monetary policy meeting. In particular, the Fed’s adoption of a new monetary policy strategy in which employment is put ahead of inflation, questions about when to reach the target path strongly in the face of inflationary pressures that may occur along with the dollar, which is depreciating due to its unlimited emissions, have highlighted the Economic Projections Report published by the Fed on a quarterly basis and the median expectations of policymakers in the markets.

Economic Projections Report, September 2020 (%)
  GDP Interest Core PCE Unemployment
  September Projection June Projection September Projection June Projection September Projection June Projection September Projection June Projection
2020 -3.7 -6.5 0.1 0.1 1.5 1.0 7.6 9.3
2021 4.0 5.0 0.1 0.1 1.7 1.5 5.5 6.5
2022 3.0 3.5 0.1 0.1 1.8 1.7 4.6 5.5
2023 2.5 0.1 2.0 4.0
Long Term 1.9 1.8 2.5 2.5 2.0 2.0 4.1 4.1

The Fed, which cut its federal funding target to 0 – 0.25 percent at an extraordinary meeting on March 16 in response to the coronavirus crisis, has been keeping interest rates at current levels for the last 5 meetings, including yesterday’s. In addition, within the context of the Fed’s willingness to support the labor market as well as create current inflation, the clearest signs that can be accepted by market participants on how much lower current interest rates will be are contained in the Economic Projections Report, which includes the expectations of policymakers. According to the report, policymakers clearly do not expect any changes in current interest rates until 2023, as shown in the table above. After that period, Powell’s statements support expectations of a long-term interest rate of 2.5 percent if he is convinced that the economy is strongly approaching full employment and the tolerable high inflation target. Again, according to the report, policy makers’ projections for contraction in 2020 declined from 6.5 percent to 3.7 percent and 2021, 2022 and 2023 growth expectations were revised in a downward direction. Thus, the Fed will possibly remain supportive in order to make the US economy recover. But it is also necessary to note the upward moderate update in the expectation of Core Personal Consumption Expenditures (PCE) and the significant downward revision of the unemployment rate.

Given that the Fed will inject low-cost liquidity into markets until 2023, the dollar remains under downward pressure in an environment where its cost and positive real returns will continue to decline, while demand for precious metals can also be expected to continue to grow moderately. In addition, it is possible to note that abundant liquidity can support the rise in stock market indices.

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