Friday's speech by the Fed chief, which investors have been waiting for, brings a decisive change in quotes at the end of the week. Jerome Powell seems to have moved many markets with his speech.
The chairman of the US Federal Reserve mentioned what many were waiting for, but in a very cautious way. He spoke about possible tapering of the asset purchase program later this year. Powell confirmed this scenario. However, he added that the Fed will not rush with it, and only the next step will be an increase in interest rates. This could mean that the market, which had started pricing in rate hikes in 2022, has to push back those expectations to 2023, which is in line with the Federal Reserve's macroeconomic projections.
Powell said he believes expectations of rising inflation have been met, and there has been clear progress toward a recovery in maximum employment. The Fed will continue to maintain the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment and inflation falls to 2 percent over the medium term. - The Fed still has a long way to go to reach maximum employment, and time will tell whether we have achieved 2 percent inflation on a sustainable basis, Powell added.
The Federal Reserve left the target range for the federal funds rate unchanged at 0-0.25 percent and bond purchases at $120 billion per month in July.
In reaction to the Fed chief's speech, US stock indices Nasdaq 100 or S&P 500 set all-time peaks, beating 15,400 points and 4,500 points respectively. Meanwhile, the lack of rush to raise interest rates after the end of QE seems to have led to a weaker dollar at the end of the week. EUR/USD rose to the 1.1800 level for the first time in two weeks. However, commodity currencies seem to have risen the most this week: the Australian dollar or the New Zealand dollar, which rose by around 2.3 percent against the USD.
We may therefore conclude that tapering will come to an end, because there is over USD 1 trillion of excess liquidity on the American markets, which will not disappear so soon, and interest rates will not rise in the near future. Consequently, loose monetary policy will continue to be conducted by the world's largest central bank.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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