Fed interest rate decision: keeping monetary policy loose and interest rates low is not the main reason for the recent rise in asset prices

At 3 a.m. on Thursday, the Fed announced a resolution at its January FOMC meeting to maintain the 0-0.25% range of the federal funds rate and the size of its asset purchase program of $120 billion a month, exactly in line with market expectations.

At the same time, in January, FOMC also completed its usual review of the "long-term goals and monetary policy strategies", reiterating its goals of promoting maximum employment, price stability and moderate long-term interest rates.

Comparison of the wording of interest rate resolution

Like previous interest rate resolutions, the Fed, which decided to stay put, made few changes to the wording of the decision, only slightly in terms of the description of the economic situation and the impact of the epidemic.

In terms of the description of the economic status quo, unlike the "economic recovery maintained but still significantly lower than the level at the beginning of the year" at the FOMC meeting in December, the January resolution turned into "the pace of recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most affected by the pandemic."

In addition, in the description of the progress of the epidemic, the Federal Reserve increased the description of the impact of vaccination on the path of economic recovery in January, while saying that the epidemic continued to put pressure on economic activity, employment and inflation. and poses a significant risk to the economic outlook (excluding medium-term outlook descriptions).

Summary of Powell's speech

In his speech at the beginning of the press conference, Federal Reserve Chairman Colin Powell maintained the dovish tone, further emphasizing that the US economy is still "a long way from achieving its employment and inflation targets."

In his speech, Powell also said that consumer spending has slowed in recent months after an initial sharp rebound, especially in services. The outlook for economic recovery remains highly uncertain, with inflation expected to remain below 2 per cent over the next 12 months. At the same time, the US economy has proved more resilient than expected, and vaccines and wearing masks can also have a positive impact.

Powell also said that monetary policy has played a very important role in supporting the economy, and it is appropriate to continue to expect interest rates to remain at current levels until inflation moderates above 2% for a period of time. At the same time, quantitative easing will continue until "substantial further progress" is made in the economy.

In a follow-up question and answer, when asked about the relationship between monetary policy and asset Bubble, Powell again stressed that there are still 9 million workers who have lost their jobs due to the epidemic. Moreover, the main drivers of asset prices over the past few months have been vaccines and fiscal policy, and low interest rates may not be as closely related to asset prices as people think. The Fed believes that what it is seeing is unlikely to lead to sustained and questionable inflation.

At the same time, with regard to the expectation of the exit of the epidemic support policy, Powell stressed that it is too early to pay attention to the policy exit, and the Federal Reserve will send a clear signal before gradually withdrawing the policy. Powell also said that at present, the Fed is more concerned about the negative impact of inadequate policy support on the economy's inability to fully recover, rather than inflation, and even welcomes moderate inflation.

Asked that the removal of the epidemic in the resolution posed a "medium-term risk" to the economic outlook, Powell responded that this was because the risks were mainly concentrated in the short term, while stressing that the overall economic outlook was getting better.