Monetary policy U. S.

Economy improved but not enough

Today’s FOMC meeting is a non market move event – economy is improved but not good enough to change the monetary course. With next scheduled meeting almost two months away, market dynamics and economic outlook in the next few months will by and large determined by the course of coronavirus. In the United States, the spread of the virus, in particular its delta mutation, might be yet peaked in the new wave that is unfolding, but its severity to human health in terms of hospitalization and death toll, is expected to be well contained. The economy will be further opened and the society will adapt to live with the virus. The pandemic nevertheless remains to be the main risk to the economic growth, especially if mutations are such to make the vaccines less effective.

Persistent and elevated inflation is the second risk to the market and the economy. However the FOMC held the view that the inflations that we experienced in the past few months, will sustain for a few months and they are reflecting transitory factors. Chair Powell articulated the meaning of transitory that they are temporary, however does not mean the prices will come down. Inflation is caused by several reasons that many economists have reached consensus. First supply bottleneck during economy open; second high energy prices; and third the low base effect in calculating inflation as the same period last year the economy was at distress. Though the Fed was not explicit, I think the current inflation is not due to economy overheat, and is not monetary policy tightening, if pursued, would help without risk to stop growth prematurely when the economy in recovery.

The FOMC judged that the current monetary policies are appropriate and balanced in supporting the recovery and maintaining price stability over mid-term as inflation expectations remain anchored around 2%. The committee acknowledged that the economic outlook has improved but there are still room to go. Though unemployment rate is lower but labour participation rate is still below pre-pandemic level. Unemployment for minority is still elevated. Note the Fed has some mandates on inclusiveness according to the new monetary policy framework.

I maintain my projection that the yield of ten-year treasury moving toward 2% by the end of this year, with expectation that asset purchases will be started to wind down around Christmas time.

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