The Fed Officially Adopts A Flexible Inflation Target; Interest Rates Close To 0% Until 2023

Fed's balance sheet sizeMany investors expected an announcement of new measures to boost the economy

Link Securities | After the Open Market Committee (FOMC)’s two day meeting, the publication of the meeting’s statement and the intervention of its president, Jerome Powell, the Fed’s “performance” did not end up pleasing everyone. The central bank adhered to the script.

Firstly, it revised upwards its growth expectations for the US economy -it now expects the country’s GDP to contract 3.7% in 2020, as opposed to the 6.5% it expected before the summer. However, the new estimates will be subject to approval by Congress of a new fiscal stimulus plan.

The Fed also confirmed that the majority of its members do not expect increases in official interest rates until the end of 2023. They also reiterated that they will allow inflation to stay above 2% for a while, until the objective of reducing the jobless rate to pre-pandemic levels is achieved.

In addition, they reaffirmed their capacity to implement new expansive monetary policies if considered necessary.

Finally, Powell pressed Congress yet again to approve a new fiscal stimulus plan. He pointed out that the non-approval of this plan is one of the greatest downside risks to the fulfillment of the Fed’s estimates, which have been made based on this new programme.

So in summary, the results of the FOMC meeting should have been neutral for stock markets. However, as usually happens in these cases, many investors wanted something more from the Fed, hoping for an announcement of new measures to boost the economy. In our view, that would have been a contradiction, given that the US central bank considers the country’s economy is behaving much better than expected.

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