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Federal Reserve holds monetary policies, fundamental changes to future expectations

Federal Reserve holds monetary policies, fundamental changes to future expectations

16 Jun 2021 10:36 PM

The US Federal Reserve decided today to hold its monetary policies, as it fixed interest in a range between 0.0% and 0.25% and fixed the asset purchase programme at $120 billion per month, divided between $80 billion per month for holding US Treasuries and $40 billion for holding mortgage-backed securities.

At the same time, the Fed’s Dot Plot curve showed that 7 members support raising interest rates in 2022, but most of the Fed members expect the rates to raise twice during 2023. This pushed the dollar to spike, indicating for fundamental changes in the Fed members directions, which pushed traders to believe that the Fed may be more inclined to tighten monetary policy in 2022 if inflation remains elevated.

The US Federal Reserve increased its forecast for US economic growth from 6.5% to 7.0% and for inflation this year from 2.4% to 3.4%.

The new expectations for the inflation and growth had given traders reason to believe that more Fed members will support the rate hike during 2022 if inflation goes above the suggested level for this year.

Immediately after the decision, the US dollar rose against a basket of major currencies, with the dollar index recording its daily gains of more than 0.6%, and US stock indices fell, with the Dow Jones index recording a decline of more than 0.9%, while the broader Standard & Poor's 500 index lost nearly 0.85%.

In the metals world, due to the increasing possibilities of interest rates hikes, gold trading prices fell near the 1835 dollars, losing more than 1%.

In a press conference, the US Federal Reserve Chairman emphasised that economic risks remain while maintaining his expectations of a return to low inflation and that the current rise is a "transient" rise. The Fed also expected the labor market to continue to advance.

On the other hand, the Fed affirmed that if inflation remains high and continues above the central bank target of 2.0%, it will take the necessary measures to ensure price stability. The Federal Reserve Chairman Jerome Powell emphasized that despite the fact that the Dot Plot indicates the possibility of a rate hike in 2023, these expectations are not decisions or commitments, and may change based on economic conditions.

It appears that the US Federal Reserve did not show any intention to reduce its bond-buying programmes at its current meeting, but it did show adjustments to growth, inflation, and interest rates expectations.

Financial markets had hoped that the Fed would be clearer about when to scale back its asset purchase programs, but the Fed committed to indicating that it would maintain its highly accommodative policies for any length of time the economy requires until the 2.0% average inflation and full employment targets are guaranteed.

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