The U.S. Fed keeps its key interest rate on hold near zero, and gives no indications that things will change anytime soon. Anthony Okolie speaks with Scott Colbourne, Managing Director, TD Asset Management, about the Fed’s easy-money policy and implications for markets.
- Hi Anthony, it was pretty much a modest-- a bit of a snoozer-- FOMC meeting. We didn't expect much out of the Fed. We haven't seen much in the way of market reaction after the 2 o'clock meeting, but that was largely expected by the market, as you noted.
They have marked to market, so to speak, their outlook for the economy and employment. So they're a little bit more upbeat on that. But they've really just tried to have little impact on the market. So broadly speaking the press statement that they've released has only very minor changes from the last meeting in March.
- Now, the Fed did acknowledge a rising inflationary pressures, but believe it's temporary. Do you see rising inflation as transitory or is it here to stay?
- Yeah, that was one of the minor changes. They did emphasize the transitory nature of the inflation. They do expect that inflation to start to creep up more than it's gone down.
In a way it's not surprising. We've come out of a pandemic. We've had a re-opening of the global economy and success on the vaccination front. So you're seeing supply chain bottlenecks that commodity price increases. And so for the broad sense is this is a transitory impact on the market.
And even the market measures that we look at, whether it's inflation swaps or break even inflation rates in the US, you know, they're all sort of indicative of higher inflation. But nothing of a substantive concern to the market. And the ultimate expectation that inflation peaks and then comes back down.
- And of course, there wasn't much talk about tapering from the Fed today. Do you see some of that talk happening down the road? What are your thoughts there?
- Yeah, that's probably what the Q&A session at 2:30 with Governor Powell is going to focus on. The market is starting to suss out where the Fed is going and when it will begin to talk about tapering. And the market has definitely priced in more hikes than what the Fed is talking about. And part of that dialogue will be when do they start talking about tapering?
Speculation is maybe they start to talk about it at the Jackson Hole meeting at the end of August or sometime in the early third quarter of this year. But you put it in contrast with other central banks, the Bank of Japan, the Riksbank in Sweden. Last night, both sort of pushed off any talk about tapering or hiking way off in the future. And obviously, there's one outlier to that, and that's the Bank of Canada in Canada, which has begun to taper as we speak.
- And finally, where do you see the US dollar going in the next little while?
- Yeah, well, we'll see continued pressure on the US dollar. Since last March, the US dollar is about a half a percent or more weaker from where it was March 17th. And you're seeing some pressure today.
The Canadian dollar is a little bit firmer. Some of the commodity based emerging market currencies are a little bit firmer. So I think they'll be continued pressure to see a weaker US dollar over the balance of the year. And we'll continue to see on a broad based basis, particularly against commodity based currencies.
- Scott, thanks again for your time.
- My pleasure. Thanks, Anthony.