FOMC Aftermath: Fed Insists on Adherence to Ultra-Easy Policy amid Rising Inflation

The US Federal Reserve yesterday concluded another scheduled 2-day FOMC meeting and decided to keep interest rates at the current near-zero level, as well as the current pace of asset purchases under the expanded QE program in the amount of about $120 billion per month despite the sharp rise in inflation and inflationary expectations.

The Federal Reserve, nevertheless, has at least slightly retreated from its rhetoric about "transitory inflation" associated with the emergence of the economy from pandemic restrictions, implying higher consumer activity.

Nevertheless, at the press conference, Fed Chairman Jerome Powell generally continued his narrative that inflation was mainly caused by some "temporary" factors, but acknowledged that there was a risk that it could be more sustainable than expected. In addition, he agreed that significant increases in prices for certain items – in particular, lumber (WOOD) and used cars (CARZ) – are not common and should be looked more carefully at.

According to the FOMC: “The path of the economy will depend significantly on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.”

However, the reluctance to change the tone of monetary policy towards at least a slight tightening against the backdrop of such an obvious change in inflationary outlook – be it for a short period or forever – clearly puzzled investors. This was accompanied by Powell's rather ambiguous phrase that "we will not reduce our asset purchases as we work towards our goals." In particular, the Fed explains the improvement of the situation on the labor market now by the mere fact that it is working towards reaching its goal, rather than by certain obvious macroeconomic factors. It turns out that the Fed sets new priorities for itself – the implementation of its own programs, and not adjustment to existing realities. If the Fed remains committed to ultra-soft monetary policy amid widespread soaring prices, this could be a toxic combination for the markets. We hope to see additional clarifications on this matter in the near future.

Such rhetoric apparently resulted in a significant, to the tune of half a percent, drop in stock indices and an increase in the treasury bond yields. This was also negative for cryptocurrencies – in particular, Bitcoin (BTCUSD), which fell 4.5% to $ 39,500. Ethereum (ETHUSD) fell by a similar share to $ 2.45 thousand.