Show Transcript
The U.S. Federal Reserve kept its key interest rate on hold near zero, and believes the bump in inflation this year will be temporary. Anthony Okolie speaks with Scott Colbourne, Managing Director, TD Asset Management, about the Fed’s Average Inflation Targeting (AIT) framework and what this means for markets.
Print Transcript
[MUSIC PLAYING]
- As expected, the Fed left rates unchanged, and once again projected zero rates through 2023. Scott, what got your attention today?
- Hi, Anthony. Yeah, it was an important meeting today. The markets were focused on the Fed because the last time we had an update on their projections was last December. And as you know, we've had the big stimulus bill in the States pass. So we are all upgrading our outlook for the US economy and the global economy.
So today's meeting was very important for investors to see where the Fed was indicating where it would go. And so for me, as you pointed out, the median dot plot for 2023 was left unchanged. I think that was a very important signal to the market. And also, I think the market wanted to see the Fed acknowledge that growth and inflation forecasts were better than where they were in December. And so these were two focuses of me and the active team at TD Asset Management as we look at this meeting.
- And long-term bond yields have been rising on vaccine optimism, as you mentioned, the recent fiscal stimulus deal. Do you see a danger of the Fed keeping its easy money policy in place for too long?
- I think the fact is investors are coming to grips with we're in a new Fed framework, right? We have average inflation targeting is the new framework. And so going into the meeting, I think investors were expecting the Fed to maybe at least increase interest rates in 2023. And they backed away from that. So we are definitely in this new policy regime, which is effectively letting the economy and inflation running a little hotter than what perhaps in the past.
And so I think it's the market coming to grips with that. Certainly, the reaction in the market has been to see longer-term rates go up. And that's part of it is also the supply, greater financing needs for the stimulus bill. But the longer-end rates have gone up a little bit. But the front-end rates are well anchored and continue to be well anchored in this environment.
- And what do you see are the biggest risks to the Fed's economic and inflation outlook?
- Well, investors want to push the Fed a bit here. And I think the risks is, do we have an overshoot on inflation? And Governor Powell has indicated that they see through this inflation expectation of an increase in inflation. They see it as a transitory, as opposed to a long-term or a secular increase in inflation. So the market's going to be watching that. But I think that for the time being that central banks, and not only the Fed but other central banks, are continuing to emphasize the more transitory nature of this expected increase in inflation going forward.
- And finally, we saw the US dollar slide a little bit following the Fed's decision today. Where do you see the US dollar going over the next little while?
- Yeah, I mean, investors are expecting the US dollar, broadly speaking, to depreciate as the global economy continues to recover. The US dollar is typically non-- it's not aligned with the global growth. It usually depreciates when we have a global economy improving. So we've seen some stabilization in the weakness of the US dollar. But I think today's policy reinforces the fact that the Fed is going to be accommodative. The Fed is going to be on hold. The Fed is looking through the inflation uptick expected. And that should over the longer-term continue to see the US dollar weaker particularly against the Canadian dollar.
- Scott, thanks again for your time.
- Thanks, Anthony.
[MUSIC PLAYING]
- As expected, the Fed left rates unchanged, and once again projected zero rates through 2023. Scott, what got your attention today?
- Hi, Anthony. Yeah, it was an important meeting today. The markets were focused on the Fed because the last time we had an update on their projections was last December. And as you know, we've had the big stimulus bill in the States pass. So we are all upgrading our outlook for the US economy and the global economy.
So today's meeting was very important for investors to see where the Fed was indicating where it would go. And so for me, as you pointed out, the median dot plot for 2023 was left unchanged. I think that was a very important signal to the market. And also, I think the market wanted to see the Fed acknowledge that growth and inflation forecasts were better than where they were in December. And so these were two focuses of me and the active team at TD Asset Management as we look at this meeting.
- And long-term bond yields have been rising on vaccine optimism, as you mentioned, the recent fiscal stimulus deal. Do you see a danger of the Fed keeping its easy money policy in place for too long?
- I think the fact is investors are coming to grips with we're in a new Fed framework, right? We have average inflation targeting is the new framework. And so going into the meeting, I think investors were expecting the Fed to maybe at least increase interest rates in 2023. And they backed away from that. So we are definitely in this new policy regime, which is effectively letting the economy and inflation running a little hotter than what perhaps in the past.
And so I think it's the market coming to grips with that. Certainly, the reaction in the market has been to see longer-term rates go up. And that's part of it is also the supply, greater financing needs for the stimulus bill. But the longer-end rates have gone up a little bit. But the front-end rates are well anchored and continue to be well anchored in this environment.
- And what do you see are the biggest risks to the Fed's economic and inflation outlook?
- Well, investors want to push the Fed a bit here. And I think the risks is, do we have an overshoot on inflation? And Governor Powell has indicated that they see through this inflation expectation of an increase in inflation. They see it as a transitory, as opposed to a long-term or a secular increase in inflation. So the market's going to be watching that. But I think that for the time being that central banks, and not only the Fed but other central banks, are continuing to emphasize the more transitory nature of this expected increase in inflation going forward.
- And finally, we saw the US dollar slide a little bit following the Fed's decision today. Where do you see the US dollar going over the next little while?
- Yeah, I mean, investors are expecting the US dollar, broadly speaking, to depreciate as the global economy continues to recover. The US dollar is typically non-- it's not aligned with the global growth. It usually depreciates when we have a global economy improving. So we've seen some stabilization in the weakness of the US dollar. But I think today's policy reinforces the fact that the Fed is going to be accommodative. The Fed is going to be on hold. The Fed is looking through the inflation uptick expected. And that should over the longer-term continue to see the US dollar weaker particularly against the Canadian dollar.
- Scott, thanks again for your time.
- Thanks, Anthony.
[MUSIC PLAYING]
