Fundamental Updates – FED: Recovery Heading Towards The Right Direction (29 July 2021)

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 JUL 29, 2021

The Fed’s decision.

The U.S. Federal Reserve delivered no surprise during their monetary policy meeting earlier today as widely expected. The Federal Funds Rate was held unchanged at the target range of 0-0.25% while quantitative easing remains at $120 billion per month ($80 billion of Treasury securities and $40 billion of agency mortgage-backed securities).

Optimistic tone on U.S. economic recovery in the rate statement.

Although no actions were carried out, the Fed did expressed signs of optimism on the U.S. economic recovery in the interest rate statement. The following changes made in the statement indicate so.

The sentence:

“Amid this progress and strong policy support, indicators of economic activity and employment have strengthened.”

has been revised to:

“With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen.”

The change indicates continued recovery in economic activities and employment.

The sentence:

“The sectors most adversely affected by the pandemic remain weak but have shown improvement.”

has been revised to:

“The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered.”

The change indicates that the sectors most adversely affected by the pandemic have improved since the previous meeting.

The sentence:

“Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.”

has been added into the latest statement, indicating optimism in the economic recovery.

Progress made in economic recovery but still far from full recovery.

Despite the optimistic tone sent out by the Fed, the central bank’s Chairman Jerome Powell cautioned during the press conference that the economy is still a distance away from making “substantial further progress” towards the Fed’s goals of maximum employment and price stability. This does not come as a surprise since the U.S. job market is still around 6.3 million jobs away from the pre-pandemic level. Furthermore, Powell highlighted that inflation is expected to remain above the central bank’s target in the upcoming months but not sufficient to trigger a change in monetary policy.

On the issue of the recent rise in COVID cases due to the Delta variant, Powell downplayed the negative impact it has on the U.S. economic recovery. He said:

“With successive waves of Covid over the past year and some months now, there has tended to be…less in the way of economic implications from each wave, and we will see whether that is the case with the Delta variety,”

expressing confidence that the handling of the Delta variant will be more effective than handling COVID-19 when it was first declared a pandemic.

Impact on the market.

The upbeat tone delivered by the Fed resulted in the market going risk-on, increasing the demand for risky assets and currencies. Thus, the safe haven U.S. dollar weakened against the other major currencies.