Fed Establishes Loose Monetary Policy Stance

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Fed Establishes Loose Monetary Policy Stance

MARCH 18, 2021

The U.S. Dollar fell during yesterday’s session following the announcement by the Federal Reserve to maintain interest rates low into the year 2023 while also having a higher tolerance for higher inflation, as high as 2.4% for 2021, that may or may not come.

Overview

Powell’s statements and policy stance no longer follow the traditional Fed guidelines to focus on inflationary growth to measure economic health, but rather leave the environment loosened so that business activity, particularly employment, picks up.

Throughout his presser, the Chairman explained that rising bond yields and prices surging are not the main issues with an economy that has seen no return of restaurants or travel after a full year of uncertainty, losses, and uneven recovery. Powell mentioned inequality and even explained that the consensus is not unanimous on Fed intervention, but what matters most to officials is seeing actual evidence of growth across all indicators, not just rosy outlooks, and upgraded forecasts before they act.

Recent data also demonstrates that even mild inflationary expectations have not been reached so the primary concern is getting as close to full employment. That certainly means letting the economy ride and actually overwhelming in its figures moving forward. The reaction we are witnessing is one of risk-on sentiment as investors feel there will be easy borrowing for the next two years that will hopefully allow businesses to take more chances. Powell also briefly spoke about the ed putting an end to stock buy-backs and other similar actions that do not stimulate the real economy. Expect swings as traders still continue to weigh how much the global recovery narrative can benefit from this. While buck is down, already about half of a percent of the advanced by Euro and other majors yesterday has already dwindled, though they still maintain a higher value than last few days.

What to Watch Today…

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EUR  

The Euro benefitted from the dovish Fed meeting and decision announcement while also getting a boost from better news on the vaccine end. Lately, it has not been a secret that the COVID situation in the Euro-zone countries has gotten worse. AstraZeneca’s negative effects in their formula only added to worry that the continent may recover slower than every other region since Italy is even considering new lockdown measures as infections spiked while many refused to take the vaccine.

Today, there will be a new assessment done in which it is expected that European Medicines Agency will give green light to the process with AZ. Additionally, the politics are pro-EU, at least in the Netherlands where the current leader Mark Rutte and his Freedom Party gained more parliamentary power thus giving a much-needed breath of stability to the continent.

GBP  

Pound Sterling is trading in familiar ranges as we are gathering reactions from the Bank of England’s Monetary Policy Committee session. BOE Governor Andrew Bailey is apparently following the Fed’s tone from yesterday as he explained that officials do not want to even consider adding to borrowing costs before they see evidence of actual inflation. The benchmark interest rate will remain at 0.1% although there had been some hawkish commentary earlier in the week about cutting quantitative easing that has been used to maintain credit flowing. We shall see if there is much movement as we await a major slew of data next week to really gauge where the U.K. is at in Q1.

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