Fed signals dovish COVID stance at an end

The US Federal Reserve has taken its first steps towards raising interest rates as the domestic economy powers ahead in COVID recovery mode, with one asset management giant saying the move could spell “the end of this long running emergency policy-focused movie”.

At its Federal Open Market Committee meeting on Wednesday, board members opted to keep the target range for the federal funds rate at 0 to 1/4 per cent, but economic projections indicated a majority of board members expected two rate rises to occur in 2023 – the soonest that the central bank has so far committed to raising rates.

In addition, Fed chair Jerome Powell indicated in a press conference after the meeting that the central bank had commenced discussions around reducing the scale of its bond-buying program, with the US’ recent success at rolling out COVID vaccines having kickstarted the domestic economy and raised the risk of inflation exceeding target levels.

BlackRock chief investment officer of global fixed-income and head of the BlackRock global allocation investment team, Rick Rieder, said the news confirmed that progress was being made towards the Fed’s goals of maximum employment and 2 per cent inflation over the long run.

“Even with the eventual tapering of asset purchases, and subsequent moderate increase in interest rates, we think it’s clear that the backdrop for the economy will generate significant employment improvement,” Mr Rieder said.

“Indeed, [projected] breakeven inflation levels of roughly 2.40 per cent at 5 years and 2.30 per cent at 10 years suggest that longer-term inflation expectations seem to be well anchored in the general view of market participants.

“It’s now time to set up for the end of this long-running emergency-policy-focused movie.”

Janus Henderson multi-asset portfolio manager Oliver Blackburn noted that in the committee’s economic projections, it was expecting growth in the US to further power ahead in the coming years.

“The 7 per cent growth rate expected is now above economists’ consensus expectations, although forecasters are more optimistic about growth in 2022 than the US central bank,” Mr Blackburn said.

“Elsewhere, the Fed’s forecasts now show a clear bias to above target inflation in the coming years. PCE inflation is forecast to be above target over the next three years.”