How Soon Could The Fed Begin Tightening Monetary Policy?

In this video, we discussed key takeaways from the recent U.S. Federal Reserve (the Fed)’s policy meeting as well as the latest reports on inflation from around the world. We also reviewed the latest U.S. retail sales and jobless-claims numbers, and wrapped up the segment with a look at recent market performance.

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Fed Signals Easy-Money Policies may Change Earlier than Anticipated

At the conclusion of its June 15-16 policy meeting, the Fed sounded a more hawkish tone, signaling that changes to its ultra-accommodative monetary policy may be coming sooner than markets have been expecting.

In particular, the central’s bank’s so-called dot plot—where individual members of the Federal Open Market Committee (FOMC) indicate their projections for future interest rates—was reflective of a decidedly more hawkish outlook, with 13 FOMC members predicting an increase in the federal funds rate by the end of 2023.

During the ensuing press conference, Fed Chair Jerome Powell said multiple times that favorable economic conditions—longer-term inflation of 2% and full employment—may be met somewhat sooner than anticipated, we stated in the video, explaining that the steep drop in U.S. COVID-19 cases and the continued lifting of business restrictions are helping to accelerate the nation’s recovery. Amid this backdrop, we expect that the central bank will begin lifting rates sometime around the fourth quarter of 2023.

Powell also addressed the topic of scaling back on the central bank’s asset-purchasing program, stressing that the Fed will give plenty of advance notice before it begins tapering its monthly bond purchases of $120 billion.

We expect that the central bank will discuss tapering at its annual August economic policy symposium in Jackson Hole, Wyoming, or during its September policy meeting. If this is the case, the actual process of reducing monthly bond purchases probably wouldn’t occur until the beginning of 2022.

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