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18.03.202104:25 Forex Analysis & Reviews: Profitability is still growing: will the Fed be able to handle its brainchild?

Before the start of the US exchange, the yield on US Treasury bonds is still trading with a plus. At the moment, the yield on the benchmark 10-year obligations has added 0.048%.

Exchange Rates 18.03.2021 analysis

Investors around the world are looking forward to the end of the Fed meeting.

Powell and his team envisioned the unprecedented stimulus triggering a financial boom in America as it did in the early 1970s.

If you look at the quarterly forecasts, starting in June, the average GDP forecast is fixed slightly higher each time. However, it is slightly higher than the average forecast of private investors in a Reuters poll.

Powell is expected to send a clear "dovish" signal: keeping the Central Bank's benchmark interest rate near zero, and a steady flow of money until Americans can return to their jobs.

At the same time, analysts believe that the Fed will be forced to take regulatory measures earlier than previously planned. Instead of 2023, the most pessimistic forecasts are called June of this year.

Tim Dye, head of US economist at SGH Macro Advisors, writes: "If the increase happens in 2023, then Powell will have to explain how this is consistent with his promise to return the economy to full employment."

Still, analysts are leaning toward an earlier timeline for tightening measures.

Thus, Morgan Stanley representatives, who previously announced the possibility of a full recovery of the economy by September 2021, call this business cycle shorter but also hotter, hoping that monetary policy will tighten from the beginning of 2022. They are confident that the next cycle will not be like the last three expansions (the cycle that ended with the pandemic lasted 10 years and according to signs, resembled the period after World War II with short recessions and strong intermediate growth).

This cycle ended when US President Richard Nixon decided to support a soft fiscal policy due to the upcoming elections in 1972. His Fed chairman, Arthur Burns, also kept interest rates low while the economy accelerated. Then the country was covered by a huge inflation, the fight against which lasted for about 10 years.

Now some analysts are confident that Powell will not allow this scenario to happen again. And Fed officials swear that this time it will be different.

Indeed, Powell's team is in a tight squeeze: on the one hand, more than 20 million Americans remain unemployed. On the other hand, too soft rates will not keep inflation down.

Fed officials say that inflation is "no longer the same." So is unemployment. Both factors behave differently than before. However, we know that the core consumer basket remains unchanged, as does the average household spending cross-section, although wages and inflation are no longer so closely linked, and the economy is no longer so dependent on oil imports.

Now the Fed is actively engaging in rhetoric, which is not a good sign. So, monthly purchases of bonds in the amount of $ 120 billion were announced until significant progress is made on the labor market and acceptable inflation in the projected 2%. Until then, it is promised not to raise the rates.

In the meantime, the state Treasury does not buy out, but large issues of debt obligations and the achievement of "pronounced results" is not visible. There remains a need for about 9 million jobs and higher indices of slow inflation expectations.

However, one way or another, we should get answers to our questions very soon. Some even believe that the new policy of the Fed is not dictated by a momentary decision, but is a new shift in the overall monetary policy, which will develop in the new economic realities.

In the meantime, the US dollar is strengthening in light of expectations for the entire currency basket, while the world market indices are declining. Many investors are wondering where to plant assets during the period of unrest. Some prefer bitcoin, which so far has little influence on events in the Fed's monetary policy.

One of the most important indicators is the "fear index" of Wall Street. And here everything is optimistic, so the probability of a stock crash against the background of rising bond yields is minimal.

Egor Danilov,
Analytical expert of InstaSpot
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