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The Fed is not considering a rate hike, noting the strengthening US economy

29 July 2021
2 min.
The Fed is not considering a rate hike, noting the strengthening US economy

Strengthening the US economy

At the end of the meeting, the Fed reassured financial markets by stating its commitment to maintaining current policy and zero rates until substantial progress on inflation and employment. The Fed does not see a serious economic threat in the new COVID-19 Delta strain.

Fed Chairman Jerome Powell held a conference on Wednesday on the outcome of the two-day July meetings of US central bank officials. The main message to financial markets in Powell's statement was that despite optimism that the US economy is strengthening, the Fed is not even close to considering an increase in the benchmark interest rate.

Rates have remained at 0.25%-0% since last March and the Fed is also pursuing a quantitative easing programme an additional measure to support the economy. The central bank currently buys at least $120bn worth of bonds a month, of which at least $80bn are Treasuries. Treasury bonds and another $40bn in mortgage-backed securities. Mortgage-backed securities.

Powell said the measures would not be withdrawn until "substantial further progress" on inflation and employment had been made. There are about 9.5 million unemployed people in the US today.

Powell reiterated that the jump in inflation of 5% in May and 5.4% in June is a temporary phenomenon that will stop once supply chain problems are resolved, demand returns to normal levels and commodity prices, especially for used cars, return to their original levels.

US GDP increased by 6.4% in the first quarter of 2021 compared to the previous year. GDP figures for the second quarter will be published on Thursday, the average forecast by economists is for growth of 8.4%. If the forecast is confirmed it would be the fastest rate since the beginning of 1983, not counting the excessive growth rate in the third quarter last year when the economy reopened after a halt due to the pandemic.

In the run-up to this week's meeting, markets were estimating the likelihood of a rate rise this year to be zero. However, the probability of a rate hike in 2022 rose from 54.4% before the meeting to 62% afterwards.

Investors will hear the next news on Fed policy at the annual central bank conference in Jackson Hole in August.

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