Fed Holds Rates Steady, No Hints of Tapering
We expect the Fed to hold off on hikes until inflation is at or above 2%.
In its latest statement, released on April 28, the Federal Open Market Committee unsurprisingly held the federal-funds rate at 0.0%-0.25%. Nobody expected a change in rates this meeting, and there were no new economic projections released, therefore, this was arguably a low-key event. Instead, the focus remains on any changes in the Fed’s language in the release and any hints at balance sheet tapering. There were no hints at tapering, and we don’t expect even a hint at tapering until the economic recovery is well on its way, at least for a couple more months--and we expect that any actual tapering will be telegraphed well in advance. The key debate today is how high inflation will get, if it will be transitory, and how long the Fed will hold off on rate hikes as inflation progresses. Based on our read of the Federal Reserve's most recent statements, we don’t plan to make any changes to our current rate forecasts in our U.S. bank models, although we admit that the risks to inflation seem to be toward the upside, and therefore rates hikes could happen sooner in a hotter environment.
Looking more closely at the release, there were no substantive changes in the verbiage. The Federal Reserve gave a nod to some of the recent upticks in certain economic activity measures, as well as the latest upticks in inflation as it slightly changed its description of the current economic environment; however, we think the key point was that the Fed chose to insert the word “transitory” when describing the current inflation environment. The full quote is, “Inflation has risen, largely reflecting transitory factors.” This fits in with our overall read of the Fed thus far. Overall, we still expect the Fed to hold off on hikes until inflation is at or above 2% for a time and until the employment market is fully healed.
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