Markets seem to have quickly recovered in the second half of Thursday after the stress caused by surprising revelations in the minutes released from the latest meeting of the Federal Open Market Committee (FOMC). on Wednesday. The statements by the Federal Reserve (Fed) after the meeting on May 19 were solid it their position that ultra-soft monetary policy would remain in place until 2023 at least. But, FOMC minutes presented a slightly different picture as some of its members stated the opinion that the Fed should begin to reconsider the tapering of bond purchasing at some point.
Markets were shaken just after the minutes came out as it was the first time since the beginning of the pandemic that Fed members even mentioned the idea of tapering stimulus measures. Such a move could bring a drastic change to the market’s landscape. Most of the risky assets like crude, stocks, most of the currencies - excluding the U.S. Dollar - were gaining in price for the past year thanks to the money printer run by the Fed.
However, this possibility of tightening monetary policy from the Fed should not be considered to be set in stone in the next few months. Such opinions are not seen to be shared by the majority of the FOMC, and the Fed’s Chair Jerome Powell didn’t even pay attention to this minority position. Rising inflation is treated by the Fed as a temporary issue as it is expected to reach more normal levels as the economy recovers. Weak U.S. employment data and retail sales in April just confirmed its quiescent position. Even those Fed members who voiced their concern are suggesting that any monetary tightening is a distant perspective.
Inflation is no longer an ultimate issue on the Fed’s agenda and the Treasury as they pump money into the economy at an unprecedented pace. Moreover, this policy has a huge advantage for the U.S. budget as yields on ten-year Treasuries are below 1.7% and annual inflation is at 4.2% - this means that the real interest rate is at -2.5%. So, it is not the Treasury that pays the interest but investors who are paying it in order for bonds to be bought. In such circumstances debt is considered to be a minor problem.
Markets were seen to calm down on Thursday as they digested the content of the minutes. So, no continuation of the decline was developed. The Greenback has resumed its downward trend as the U.S. Dollar index returned to 89.8 points. A downward pressure may drag the index to 89.6 points, and even further down to 89.2 points.
So, an immediate affect from this Fed’s members minority report may not be expected. However, it may be interpreted as a warning sign that the Fed may quickly change its attitude if the U.S. and global economy continue to pick up rapidly and the CPI in the U.S. jumps close to 4.5%.
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