At its meeting overnight, the Federal Reserve kept its fed funds interest rate unchanged at 0.00-0.25% and left its pace of quantitative easing at USD120 billion a month of bond buying.
The Fed was cautious on the very near-term outlook given winter virus waves, noting: ‘the pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic.’
The central bank’s concerns about the immediate outlook may have contributed to the sharp fall in US stocks overnight with the S&P 500 down -2.57%. But the Fed stressed it would keep monetary policy very loose to support the recovery and vaccinations would allow economic activity to return to more normal levels over time.
We thus see the Fed’s dovish stance continuing to support risk assets over the course of 2021.
First, the central bank is squarely focused on returning the economy to its twin goals of full employment and stable inflation. In his post-meeting press conference, Fed Chair Jay Powell rebuffed questions on the recent spikes in individual US firms’ share prices, noting: ‘I don’t want to comment on a particular company or day’s market activity.’
Second, Powell pushed back on fears the Fed would start slowing down its quantitative easing this year.
Source: Bank of Singapore, Bloomberg
‘In terms of tapering, it’s just premature. We just created the guidance [on how long the central bank would keep printing money and buying bonds]. We said we wanted to see substantial further progress toward our goals.’
Third, Powell said the Fed expected inflation to return to its 2% target this year. But he warned it would only be a ‘transient’ rise caused by the base effects of last year’s weak inflation readings at the start of the pandemic falling out of the year-on-year change in consumer prices now.
Instead, Powell said the Fed wanted ‘inflation moderately above 2% for some time’ - to achieve its new strategy of inflation averaging 2% over the business cycle - before the central bank would consider raising interest rates.
This would make up for the prior years that the Fed has undershot its inflation target (see chart).
Last, Powell said it ‘appropriate’ that Congress was discussing further fiscal stimulus to support the recovery after the Biden administration proposed fresh aid worth USD1.9 trillion. But the Fed Chair reiterated very loose monetary policy would still be needed to boost the recovery.
The Fed’s meeting thus underscores our view that the central bank will keep supporting risk assets in 2021 while also undermining the safe-haven USD.
We expect the Fed will not start tapering its quantitative easing until 2022. We also do not see interest rates being raised until at least 2024 with inflation likely to remain below 2% for much of the next three years.
Important information
This product may only be offered: (i) in Hong Kong, to qualified Private Banking Customers and Professional Investors (as defined under the Securities and Futures Ordinance); and (ii) in Singapore, to Accredited Investors (as defined under the Securities and Futures Act) and (iii) in the Dubai International Financial Center to Professional Clients (as defined under the Dubai Financial Services Authority rules) only. No other person should act on the contents of this document.This product may involve derivatives. Do NOT invest in it unless you fully understand and are willing to assume the risks associated with it. If you have any doubt, you should seek independent professional financial, tax and/or legal advice as you deem necessary.
Please carefully read and make sure that you understand all Risk Disclosures, Selling Restrictions, and Disclaimers. This document must be read together with the relevant Prospectus & Offering Documents &/or Key Fact Statement.
Disclaimer
This document is prepared by Bank of Singapore Limited (Co Reg. No.: 197700866R) (the “Bank”), is for information purposes only, and is not, by itself, intended for anyone other than the recipient. It may contain information proprietary to the Bank which may not be reproduced or redistributed in whole or in part without the Bank’s prior consent. It is not an offer or a solicitation to deal in any of the investment products referred to herein or to enter into any legal relations, nor an advice or by itself a recommendation with respect to such investment products. It does not have regard to the specific investment objectives, investment experience, financial situation and the particular needs of any recipient or customer. Customers should exercise caution in relation to any potential investment. Customers should independently evaluate each investment product and consider the suitability of such investment product, taking into account customer’s own specific investment objectives, investment experience, financial situation and/or particular needs. Customers will need to decide on their own as to whether or not the contents of this document are suitable for them. If a customer is in doubt about the contents of this document and/or the suitability of any investment products mentioned in this document for the customer, the customer should obtain independent financial, legal and/or tax advice from its professional advisers as necessary, before proceeding to make any investments.
The Bank, its Affiliates and their respective employees are not in the business of providing, and do not provide, tax, accounting or legal advice to any clients. The material contained herein is prepared for informational purposes and is not intended or written to be used, and cannot be used or relied upon for tax, accounting or legal advice. Any such client is responsible for consulting his/her own independent advisor as to the tax, accounting and legal consequences associated with his/her investments/transactions based on the client’s particular circumstances.
This document and other related documents have not been reviewed by, registered or lodged as a prospectus, information memorandum or profile statement with the Monetary Authority of Singapore nor any regulator in Hong Kong or elsewhere.
This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Singapore, Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates (collectively, “Affiliates”) to any registration, licensing or other requirements within such jurisdiction.
