The Fed slowed down // The regulator indicated its readiness to start curtailing the purchase of assets soon

The US Federal Reserve System (FRS) following the September meeting decided to keep the key rate at the level of 0-0.25% per annum. At the same time, the regulator came close to announcing the curtailment of the asset repurchase program – in its statement it is indicated that such a decision may become “justified in the near future.” Fed Chairman Jerome Powell did not rule out the completion of the program by the middle of next year, which will be a step towards tightening policy and may become a problem for emerging markets. Interest rate expectations have also shifted sharply: now half of the open market committee members expect it to rise next year.

The Federal Open Market Committee of the US Federal Reserve yesterday refrained from changing the rate (urgently reduced to the level of 0-0.25% in March 2020). The updated dot graph with forecasts of the rate dynamics now suggests its possible increase as early as next year – the number of votes was divided equally (in June, the schedule provided for two rate increases only in 2023). A rate hike in 2023 is now expected by 17 out of 18 committee members, in 2024 – all 18.

The main change affected the prospects for curtailing the quantitative easing program – for the first time, the Fed indicated that this could happen “soon”. Recall that now the volume of the buyback is at least $ 120 billion per month ($ 80 billion in government bonds and $ 40 billion in mortgage securities). The regulator indicated that the economy has shown progress towards achieving employment and inflation targets and if the situation continues to develop in line with expectations, then the reduction in foreclosures “may soon be justified.” Fed Chairman Jerome Powell noted that inflation may remain at an elevated level due to supply problems, and also did not rule out that the asset repurchase program could be completed by mid-2022.

In assessing the state of the economy, the regulator reiterated that indicators of economic activity and employment continued to improve, and the sectors most affected by the pandemic are recovering, but the increase in the number of new cases of coronavirus infection has slowed this process. At the same time, the wording on the state of inflation was corrected, which is now “at an elevated level, which is mainly a consequence of temporary factors.”

Significant changes also affected the macro forecast: the Fed downgraded the estimate of US GDP growth for this year from 7% to 5.9%, increasing the next from 3.3% to 3.8%. For 2023, the forecast has been reduced from 2.5% to 2.4%, and in 2024 (this is the first estimate), growth is expected to slow down to 2%. In contrast, the unemployment rate in the United States has been raised this year – from 4.5% to 4.8% this year. The revision also affected the inflation rate – it could amount to 4.2% against 3.4% expected in June, in 2022 and 2023 the indicator will slow down to 2.2% (here the forecast is only slightly changed), in 2024 inflation may be 2 , 1%, in the medium term – 2%. Consumer spending inflation, which the regulator is targeting, accelerated to 4.2% in July, excluding food and energy – to 3.6%, a month earlier the figure was 4% (3.6%). The unemployment rate in August fell further by 0.2 points to 5.2%.

“The Fed gave a strong hint that the curtailment of asset purchases could begin as early as November, probably due to expectations that inflation will not be as short-term as anticipated,” Capital Economics said. Considering that the inflation target has been achieved, only a slight decrease in the unemployment rate is necessary – for this, there will be enough positive data on the creation of new jobs, the center believes. The median forecast of Fed leaders suggests that the rate will be 0.3% by the end of 2022, 1% by the end of 2023, 1.8% by the end of 2024 and 2.5% in the long term. This forecast also indicates the close achievement of targets in the assessment of the Fed committee. The director of the analytical department at Freedom Finance, Vadim Merkulov, believes that the rate hike may begin in early 2023, by which time the asset repurchase program will also be completed.

Tatiana Edovina

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