US Fed hints at tapering of asset purchases

Last Wednesday, the US Federal Reserve kept unchanged the target range for the federal funds rate at 0 to 0.25 per cent. It also reiterated that it expects it will maintain this target range until labour market conditions reach levels consistent with maximum employment and inflation is on track to moderately exceed two per cent for some time.

Meanwhile, the latest dot plot projections from the Fed members showed a majority of officials now expect interest rates to be raised next year compared to previous forecasts calling for the first rate hike in 2023. The Fed also hinted that tapering of the central bank’s asset purchases could begin in the near future, citing progress towards its goals of maximum employment and price stability. The Fed said a “moderation in the pace of asset purchases may soon be warranted” if progress towards its goals continues as expected. The Fed is currently implementing its bond purchases at a rate of at least US$120 billion a month but is expected to begin scaling back later this year.

Meanwhile, China kept its benchmark loan prime rates (LPR) unchanged for the 17th consecutive month, as expected. The one-year LPR was kept unchanged at 3.85 per cent and the five-year LPR at 4.65 per cent. The LPR is fixed monthly based on the submission of 18 banks, though Beijing has influence over the rate-setting. With the economy losing momentum and concerns around the pro­perty sector growing, policy rate cuts by the PBoC could come as soon as next month. Eco­no­mists forecast cuts to the PBoC’s policy rates, including the LPR starting next quarter.

Germany’s Ifo economic institute has reduced its economic growth forecast for Germany for this year as supply chain disruptions and a lack of microchips and other goods are slowing down the recovery from the pandemic. The Ifo now sees Germany’s GDP expanding 2.5 per cent this year, down 0.8 percentage points from its previous forecast, and 5.1 per cent next year, up 0.8 points. Strong demand from abroad and robust local private consumption are nevertheless expected to drive the recovery this year and next.

The worst-than-expected rebound in 2021 follows a plunge of overall economic output by 4.6 per cent in 2020 caused by coronavirus restrictions to contain the spread. The German government had forecast growth of 3.5 per cent for this year and 3.6 per cent for next, and it will update its estimates in October. Germany’s next coalition government is expected to inherit a still-fragile recovery from Chancellor Angela Merkel, who is stepping down after 16 years in power, following today’s election.

This article was prepared by Bank of Valletta plc for general information purposes only.