Overall, the Fed statement, the projections and the Fed press conference showed that monetary policy will remain ultra-expansive in the coming years. Powell assured that the monetary authorities will use all available monetary policy instruments depending on how the economy develops. In addition, he emphasized repeatedly and almost dogmatically that the new Forward Guidance is a powerful and mighty concept to manage the expectations of market participants. In our view, the commitment to raise key interest rates only once the inflation rate has reached the 2% mark on average is both far-reaching and unconditional. In particular, this commitment must be seen against the background that the guardians of the currency in their projections expect an inflation rate of just 2% in 2023 as well. According to the new forward guidance, the first key interest rate hike is likely to take place in 2025 at the earliest.
Our assessment: wait and see until the presidential election
Powell has left all doors open for himself to adjust the monetary policy stance in line with further developments. The markets expected that the guardians of the currency would probably not raise key interest rates in 2023 either. In our opinion, the Fed will now switch to a wait-and-see strategy, especially since the US presidential elections are on the agenda for the time being in November. Powell has confirmed this, which means that the Fed meeting was received as slightly hawkish by some market participants overall. The Fed will stick to its securities purchases and add around USD 80 billion in US government bonds per month to its balance sheet. Should yields at the long end of the curve rise more strongly than the currency guardians are currently willing to do, we expect increased purchases of longer-dated bonds. Yields on ten-year US Treasuries are likely to remain low for the foreseeable future.
other structural obstacles to growth. Suga has already announced that he intends to advance the country’s digitization and seeks to reform the fragmented regional banking system.
The new head of government should not lack assertiveness. After all, he has an intimate knowledge of the Japanese bureaucracy and is able to use it to achieve his goals. If under his leadership Japan manages not only to defeat the corona pandemic in the country in the short term, but also to increase the longer-term growth potential and actual growth rates with structural reforms, Japan would have a chance to begin the fiscal consolidation that is necessary in the long term.