The US Federal Reserve has been reviewing its interest rate and monetary policy against the backdrop of turbulent global politics and wild moves in the stock market in the fourth quarter of last year. It pledged to be “patient” in raising interest rates and said it will adopt a “flexible” stance in balance sheet normalization. Clearly, the central bank is turning more dovish.
Minutes from the January meeting of the Federal Open Market Committee, which were released last week, point to easier monetary policy ahead.
The minutes indicated that US economic growth was solid in terms of employment, industrial output, household spending, and property investment. But the consumer price increases have stayed roughly constant, which made it unnecessary for the Fed to stick to its previous balance sheet reduction plan.
The key message in the minutes is that “the level of reserves would likely be somewhat larger than necessary for efficient and effective implementation of monetary policy.”
The minutes went on to say that policymakers suggested “further very gradual decline in the average level of reserves”. It indicates the Fed may continue to reduce its balance sheet but in a very limited way.
As liquidity is less of a concern now, global equities keep rising.
Ray Dalio, founder of hedge fund Bridgewater, warned that economic boom fueled by borrowing and money-printing is unhealthy.
Still, the stock markets are set to move higher as the Fed and People’s Bank of China are in a synchronized easing mode. Any major correction might be a market entry opportunity.
This article appeared in the Hong Kong Economic Journal on Feb 25
Translation by Julie Zhu
[Chinese version 中文版]
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