FX.co ★ Key rate hike is still long way off

In a previous article, it was stated that a rate hike in America is not expected any time soon. That makes sense since the Fed is still buying $105 billion worth of bonds a month. Every month this amount will be reduced by $15 billion. At the same time, it is an infusion of money into the American economy in any case. In other words, it will get smaller and smaller from month to month. A rate hike is a tightening of monetary policy. That is, on the one hand, the Fed will continue to ease it and on the other hand, it will tighten it. That is why it was surprising when the Bank of England, having not yet completed its QE programme, already shows its willingness to raise rates! However, in the US, the issue is clear. Despite the dot plot which shows that already more than half of the FOMC members expect a rise (one or two) next year, some members are not so optimistic on the issue. For instance, Fed Vice-Chairman Richard Clarida states that the Fed is "clearly ways away from" considering raising interest. Clarida said he believed that these necessary conditions for raising the target range for the federal funds rate will have been met by the end of 2022. The Fed vice-chairman also thinks that the maximum employment rate will be reached no earlier than the end of next year.

First, the quantitative easing (QE) program will be completely phased out. This will take eight months. Then the Fed will assess the recovery in the labour market and the inflation rate. And then, in the second half of 2022, it will decide exactly when to start the key rate hike. Of course, a lot can change over such a long period of time. For example, new strains of coronavirus emerge, which tend to be more infectious and dangerous than previous strains. In other words, the virus mutates and adapts to its environment. Thus, there is simply no way to be sure that a new virus will not emerge in a couple of months that will be completely resistant to all existing vaccines and new medicines. Already, some countries in Europe have imposed new lockdown restrictions. And this is almost two years after the start of the pandemic, when there are enough vaccines in the world. Thus, all predictions about the future of the economy and the Fed's upcoming monetary policy are dubious. Stock indices may continue to rise for a few more months as the Fed's monetary policy remains soft.