As the latest FOMC two day meeting ended on April 28, the Fed kept policy and forward guidance unchanged. Salman Ahmed, Global Head of Macro and Strategic Allocation at Fidelity International comments:
“The statement’s characterisation of the current state of the economy and inflation was notably better than the last meeting, and Chair Powell highlighted both ‘unprecedented’ fiscal policy and ramp-up in vaccination programmes as key factors. That said, the current communication remains consistent with forward guidance that substantial progress will need to be seen before the central bank reassesses the highly accommodative policy stance, with the current rise in inflation seen as transitory – a view Chair Powell was keen to reinforce in the press conference.
“We think that heavy debt burdens, which continue to rise on the back of ongoing massive fiscal easing, will need the Fed to keep real rates negative and thus help keep debt service ratios in check. While the Fed has indicated that it will now consider composition of employment along social dimensions as well as in setting policy, the end result remains a central bank committed to running the economy hot while facilitating the heavy fiscal easing which continues to build.
“Medium term risks to US yields are to the upside driven by higher inflation expectations, but in the short-term the ongoing forward guidance will likely help keep volatility in rate markets under check for now. But further tests of the Fed’s credibility lie ahead.”