Although no further monetary policy measures are likely to be initiated at the forthcoming meeting of the FOMC, the current orientation gives sufficient cause for discussion.
The question of what else the Fed can do to ease monetary policy is also a matter of disagreement within the FOMC. Negative key interest rates or a so-called „yield curve control“ were recently rejected by a majority. Some currency watchdogs want to sharpen the forward guidance and give market participants more clarity about the future direction of monetary policy. In our opinion, the Fed should now emphasize in its press statement that key rates will only be raised once the average inflation target of 2% has been reached „sustainably“. This would enable the Fed to concretize its forward guidance and anchor a low level of key rates in the longer term. However, the guardians of the currency will not give any precise details as to how long inflation will actually remain higher.
Updated projections will be published in the wake of the FOMC meeting on a regular basis, with expectations for 2023 being newly included in the forecasts. In June, the monetary watchdogs stated on the record that neither the personal consumption expenditure deflator (PCE) nor the core personal consumption expenditure rate (core PCE) will be a two before the decimal point by the end of 2022. On a median basis, the guardians of the currency expected an inflation rate of around 1.7% for 2022. Even if the Fed economists are now issuing a forecast for 2023, the expected rise in inflation is unlikely to exceed the 2% mark by much. However, since even the price increase, which has been too low on average in the past, is to be compensated for and inflation rates above 2% are thus targeted, key rate hikes up to 2023 or even longer are unlikely to be on the agenda. We assume that the majority of Fed economists are also assuming that zero interest rates will be maintained in 2023. The Fed will thus remain ultra-expansive for the time being.
At the press conference, Fed Chairman Powell is likely to comment in detail once again on the recently published strategy change. He is also likely to reiterate that Congress must initiate further fiscal policy measures to support the economy. Overall, Powell is also likely to stress that the economic outlook is very uncertain due to the health crisis.