Fed Chairman Jerome Powell did well in terms of providing clarity on what lies ahead. By reiterating the dovish stance, he has managed to put a tab on speculations and bring the sanity back on wall street for now.
The earlier indications that the central bank could start to withdraw its easy monetary policies had created a panic in the bond market. The benchmark U.S. Treasury yields at 13-month highs created panic across the global markets.
Fed gives a new hope:
With key announcements post-Fed’s meeting, the chairman has managed to gain the trust of the bond market. In a major policy indication, the central bank has boosted its economic forecast. But more importantly, it has indicated that rate hikes are unlikely at least through 2023. It also expects higher inflation this year, but only temporarily. Overall, the Fed expects inflation to remain below 2%.
Powell reinforced that Fed will not move away from zero interest rates and continue its bond purchases. These comments have come as a major relief for the market. It also defused the concerns that the central bank would soon start to wind up some of its relief measures.
The effect was visible immediately as treasury yields came off their highs of the day and the stock market picked up. The Nasdaq Composite reversed its losses, ending 0.4% up. The Dow Jones closed above 33,000 for the first time, ending the day at a record 33,015, a gain of 0.6%.
Inflation spike on the cards:
With Fed reiterating its commitment to keep the interest rates down to fuel growth, a bump in inflation is not entirely ruled out. However, it is expected to be short-lived. The inflation price pressure is expected to ease down to 2% in 2022 following a spike to 2.4% in 2021.
Greenshoots appearing for the US economy:
Powell also talked about the other bright spots of the economy. Job gains have picked up in February with 3,79,000 jobs added to the payrolls. However, there is still a long way to go as ~95 lakh people have lost their jobs as compared with a year ago.
In addition to the dovish policy stance, President Joe Biden has signed an additional $1.9 trillion of pandemic aid. It is likely to boost the growth further. The Fed also expects consumer spending to pick up with a swift vaccination program and further easing on lockdown restrictions.