An overview of the US Federal Reserve policy meeting this week as well as other major central banks
The world's largest central bank, the US Federal Reserve, as expected, was the first to signal the beginning of the end of the ultra-loose monetary policy introduced at the beginning of the coronavirus pandemic and the gradual reduction of its massive bond-buying program.
The US Federal Reserve began opening its doors to monetary policy changes in projections of the accelerated timetable for interest rate increases. This signalled the beginning of the end of the pandemic-driven policy which included talks on how to end a massive bond-buying program introduced at the beginning of the crisis of the COVID-19 pandemic.
The multi-month emergency that constrained the US economy has faded into an improving health situation that resulted in a surging inflation and a strong economic growth. These outcomes, of course, are contributing to the central bank's decision.
The Fed announced that changes in the policy may happen earlier than expected and moved its projections for rate hikes from 2024 to 2023, with the majority of FOMC policymakers supporting the scenario, while some see the rates moving even higher next year.
The US central bank's head Jerome Powell, in the press conference, stated that, in addition to a decision for initiating the rate increase process, the policymakers also discussed about when to start tapering the Fed's $120 billion in monthly bond purchases, as the economy continues to heal and expressed confidence that the US economic recovery is on track. A confirmation of the Fed's decisions was the omission of their common phrases regarding the health crisis weighing on the economy.
The Fed expects the US economy to grow 7% this year yet, based on its projections on faster than expected economic recovery, the decision to keep the policy unchanged in its June's meeting signals that a change in their rhetoric does not mean a policy change is imminent.
The central bank announced earlier that the talks about tapering and first-rate hikes will come to the agenda once two key requirements -steady inflation slightly above Fed's 2% target and return to full employment- will be fulfilled.
The recent data showed a stronger than expected rise in consumer prices, which the central bank sees as temporary, but policymakers remain cautious as persisting higher inflation could lead towards earlier rate hikes.
On the other hand, the labor market is kept at the back foot as the economy is still short for about 7.5 million jobs compared to the period just before the start of the pandemic. That is far from what the Fed's goal is and may even delay the planned changes in the monetary policy.
The other major central banks are expected to remain on hold for now as they were waiting for the Fed to make the first step, although the economic conditions in their countries -despite the similarity on impact from the pandemic- were different.
The European Central Bank (ECB)
The ECB agreed to keep an ultra-low borrowing cost and to maintain its bond purchases at an elevated pace, as policymakers did not discuss tapering the stimulus at the central bank's latest policy meeting, despite the fact that economic growth recovers faster than expected.
The European Central Bank's President Christine Lagarde said that it is too early to debate these issues, although the eurozone economy is at a turning point.
Lagarde added that economic recovery must be firm and sustainable before the ECB can start talking about reducing its Pandemic Emergency Purchase Program (PEPP), worth 1.85 trillion euros.
The ECB is expected to start discussing the end of the program at their September policy meeting, but policymakers fear that they may not have the data they need to decide the future of its emergency bond-buying program by then.
Economists do not expect the central bank to extend or enlarge the program again, but to more likely shift policy support to older Asset Purchase Program that would support the recovery until the economy returns to the pre-pandemic level.
Bank of England (BoE)
The Bank of England policymakers will meet next week with big expectations to leave policy unchanged. Yet, investors expect an indication on how and when it plans to start changes in the monetary policy.
British inflation unexpectedly jumped in May and hit the levels above BoE's 2% target, driven by post-lockdown acceleration in economic activities that lifted prices.
Higher inflation and solid economic figures add to speculations that the BoE could follow the Fed lead and be one of the first central banks to start tightening the policy, as currency markets are fully pricing in a 0.25% rate hike by the end of 2022.
The situation of the increased number of new cases of the Delta variant of coronavirus is closely watched as it may further extend current restrictive measures that have been extended for one month, something that hurts the economic recovery and may delay the central bank's plans.
Reserve Bank of Australia (RBA)
Australia's central bank is likely going to extend its bond purchase program in its next policy meeting in July, with the aim of meeting its goals of boosting the still fragile inflation and employment.
Although the policymakers first discussed tapering or even ceasing it massive quantitative easing program when it expires in September, the RBA is very likely going to keep the ultra-low interest rate and extend the A$100billion bond purchases for six months, as this is one of the key factors underpinning accommodative policy necessary for the economic recovery.
The policymakers explained the need for easy monetary policy until wage growth rises sustainably above 3% to help to reach 2%-3% inflation target, as inflation is currently at record low of 1.2% and wage growth at 1.5%, which is well below 2% in Europe and 3% in the United States.
The central bank expects wage pressures to remain subdued until 2024, despite strong growth in employment which is expected to continue in coming months.
This article was submitted by Windsor Brokers.
