Fed very cautiously hints at easing aid | Financial

This seems to be a very cautious first step towards tightening monetary policy. Although Powell did not want to comment on Wednesday when the support can be phased out.

For the time being, that is not the case, and the Fed will maintain interest rates in a range of 0 to 0.25%. The central bank also continues to buy $120 billion in bonds a month.

Pressure on the Fed has already increased in recent months, as inflation is also rising. In May, it already moved towards 5%, well above the Fed’s target of 2%. Powell said he expects inflation to fall again in a few months, averaging around 2%, as he and his fellow executives would like to see.

“It’s hard to say exactly when that will be,” Powell said Wednesday night. “If inflation gets too high, we intervene. Moreover, inflation is only half of our mandate.”

In addition to manageable inflation, the Fed also aims to maximize employment. The US is not there yet either, in June unemployment stood at 5.9%. The Fed expects that percentage to fall in the coming months as the economy continues to start up. Powell called the job market “very strong,” with many vacancies and rising wages.

ING economist James Knightley also does not expect ‘tapering’, as the phasing out of support from central banks is called, in the very short term. “U.S. employment is still 6 million lower than before the pandemic, while the delta variant represents a new source of uncertainty.”

Exciting balance

This reduction is a complicated balancing act for central banks. In recent years, stock markets have fully benefited from the billions from central banks. Withdrawing too quickly or making too strong statements can cause panic in the financial markets. Powell has not yet looked at the cards under which circumstances the Fed will turn off the money tap. The only thing he wanted to say is that it is likely that the Fed will cut back on bond purchases before interest rates go up.

How exciting markets are finding this balancing act became apparent shortly after the Fed issued the statement that the US is getting closer to the Fed’s target. Immediately afterwards, the dollar fell 0.3% against the euro, currency analyst Ima Sammani of Monex Europe noted. “This is enough to convince markets that an earlier announcement of tapering is imminent. This announcement is likely to take place in September or December.”

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