Wednesday 17th March 2021
"She doesn't flinch"
The markets are nervous about the Fed
Investors today pay particular attention to one man: Jerome Powell. The head of the US Federal Reserve will comment on inflation and the interest rate today. Fear of a rise in inflation had recently driven higher yields on US bonds with longer maturities.
Despite the prospect of an upswing fueled by corona aid worth billions of euros, the US Federal Reserve is likely to remain true to its ultra-loose course. It is currently supporting the economy with, among other things, the low interest rate of zero to 0.25 percent and monthly securities purchases with a volume of 120 billion dollars. Experts assume that this will remain the case for the time being and at the same time refer to the increasing nervousness on the bond markets before today's interest rate decision.
"It will be crucial that the Fed confirms that it will stick to its monetary policy for a longer period of time," said economist Robert Greil from the private bank Merck Finck. He expects the Fed to make a clear commitment to continuing attractive financing conditions, which it can use to counter a further rise in government bond yields.
The yield on ten-year bonds has risen sharply this year and has now reached the 1.6 percent mark. The trigger was the expectation of higher inflation in the course of an upswing. Fed chairman Jerome Powell was recently stressedly relaxed about the rise in yields: Although it was "remarkable", he did not see any "disorderly" movement in it. Therefore, there is no need for the Fed to intervene more strongly in the market – for example by forcing securities purchases.
The monetary authorities will adhere to this line of approach, according to the forecast by Commerzbank economist Bernd Weidensteiner: "The Fed is not flinching: it will probably not change its monetary policy at the next meeting." Because the monetary authorities would see the rise in returns as normalization. Measures such as a re-launch of the so-called 'Operation Twist' – i.e. a postponement of purchases towards longer terms – are therefore not to be expected for the time being, said Weidensteiner. The Fed undertook such fine-tuning of monetary policy in 2011 in the aftermath of the financial crisis. At that time, it replaced short-dated bonds on a large scale with longer-dated papers in its portfolio in order to ensure favorable financing conditions.
No inflation worries
Axel Botte from the French investment house Ostrum Asset Management is critical of the demonstrative serenity of the Fed leadership: "Jerome Powell risks exposing the Fed to speculative market movements." The tug-of-war between the central bank and the financial markets will focus on the development of inflation expectations, and the pressure will increase, the economist predicts.
In view of the recent inflation rate of 1.7 percent, according to KfW chief economist Fritzi Köhler-Geib, the Fed does not have to worry about inflation for the time being. This also applies if a noticeable increase is to be expected in the short term, since the Corona crisis led to significant price drops last year. "The US Federal Reserve is calm and stressed several times that it will see through these temporary effects." In the next few months, the recently marked economic recovery will give inflation a further boost. The successful vaccination campaign, falling infection rates and the $ 1.9 trillion economic stimulus package from US President Joe Biden provided economic tailwind.
At the meeting, the US Federal Reserve will also present economic forecasts and an interest rate outlook from its leaders. In December, the Fed leaders assumed on average that the key interest rate would be kept close to zero until the end of 2023. The economists at BayernLB point out that at least one step up by a quarter of a percentage point by the end of 2023 has now been priced into the market. According to the Postbank economists, three steps of 0.25 percent each are expected on the futures markets in the course of 2023: "However, this contrasts market expectations with the Fed's communication."
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