Bond rates move in opposition to bond prices. Therefore, increasing the amount of purchases made by the central bank, in theory, raises prices and lowers interest rates.
All Eyes Are Now On FED’s Economic Forecasts
The FED publishes its economic forecast at one of every two FOMC meetings, and the latest data were published in December. Investors will now look to see if there is an increase in growth or inflation forecasts as the COVID-19 rescue package is signed and implemented.
Investors will also want to see if FED members have adjusted their point graphs to show an increase in interest rates before the end of 2023.
But don’t get too excited. Many analysts do not believe that FOMC members will be completely honest with their interest rate estimates for fear of making the markets even more turbulent.
The most likely outcome is that the FOMC does not make a change in policy and Powell reiterates that sustainable, inclusive employment is a priority and no serious inflation is on the horizon.
In fact, FED members see no problem with a moderate rise in inflation and an accompanying increase in interest rates, as long as expectations remain “ironed”.
The problem is right here. The FED has thought seriously about inflation and decided that it no longer needs to worry too much about it. But the problem is that although the FED can change its policies, it cannot change the laws of nature in finance.
The 2008-09 financial crisis seemed to have eradicated inflation, but the extraordinary monetary and fiscal measures now implemented in the name of combating the epidemic have revealed a unique situation in which some feared it would rekindle inflation.
Treasury Secretary Janet Yellen, a former Fed President and a successful economist, said on Sunday that inflation is likely to rise with the stimulus, but she believes this will be a temporary situation and the risk of a rapid rise in prices is very low.
Kaynak: St. Louis FED
A standard market measure of inflation expectations — the 10-year breakeven rate from inflation-protected Treasury bonds — approached 2.3% last week, the highest in nearly eight years.
The determination of the FED to make important moves if necessary anchors inflation expectations, and concerns about the weakening of this determination and the loosening of iron are on the rise.