Fed | Unlikely to raise interest rates before the end of 2022, will reduce QE before raising rates

The U.S. Department of Labor released the Consumer Price Index (CPI) for March on the 13th. The data shows that due to a significant increase in gasoline prices, the U.S. CPI rose by 0.6% month-on-month and 2.6% year-on-year, with the annual increase hitting a new high since August 2018. However, despite the higher-than-expected inflation, the Federal Reserve (Fed) reiterated yesterday that the probability of raising interest rates before the end of 2022 is low.

Fed Chairman Jerome Powell recently stated in an online meeting of the Economic Club that the U.S. economy is at a turning point and will enter a period of "accelerated growth," which will create a significant number of job opportunities. Additionally, he emphasized that the likelihood of raising interest rates before the end of 2022 is low, but before raising rates, there may be a reduction in the "bond-buying scale."

Since the outbreak of the pandemic last year, the Fed has announced monthly purchases of $120 billion in U.S. bonds for "stabilization." This not only increases market liquidity but also lowers interest rates. However, the Fed also stated that as "actual progress" is made, quantitative easing (QE) will gradually phase out.

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During the meeting, Jerome Powell stated:

Since December of last year, we have stated that after making substantial progress, we will reduce the scale of bond purchases. This is likely to occur before we (the Fed) raise interest rates.

When Will Interest Rates Start Rising?

Fed Chair Jerome Powell has indicated that the decision-makers will only consider raising interest rates after inflation has been maintained at 2% for a period of time and the job market has recovered. Last month, the FOMC meeting projections suggested that the majority of Fed officials believe that interest rates will remain around 0% until 2023.

Not only does Jerome Powell believe that the economy will see a strong recovery in 2021 and interest rates will not rise before 2023, Fed Vice Chair Richard Clarida also expressed a similar view at yesterday's Shadow Open Market Committee (SOMC) meeting.

Richard Clarida stated, "We will 'taper' our asset purchases at some point before we raise interest rates," but he also noted that this is predicated on a strong recovery in 2021, which he predicts will be the fastest year of economic growth in 35 years.

Dovish Stance Boosts U.S. Stocks and Crypto Markets to Record Highs

The Fed has pledged to maintain an accommodative monetary policy and to be "patient" until the expected targets are met.

Jerome Powell stated that most Fed officials predict that there won't be a need to raise interest rates until around 2024, and this dovish stance has also propelled stock and crypto markets to record highs.

The Dow Jones Industrial Average (INDEXDJX: DJI) closed at 33,730 points yesterday, up 0.16%, hitting an intraday high of 33,911.3 points; the S&P 500 Index (INDEXSP: INX) also surpassed the 4,000 mark, closing at 4,124.67 points with a slight decline of 0.41%; the Nasdaq Composite Index (INDEXNASDAQ: IXIC) set a new high of 14,175 points in mid-February and closed at 13,857.84 points yesterday.

Not only U.S. stocks, but Bitcoin (BTC) also reached a historical high of $64,869 the day before. According to TradingView data, Bitcoin has surged over 116% this year, rising from $28,990 at the beginning of January to $62,900 currently.

In addition to the strong market performance, the Fed has significantly raised its forecasts for economic growth and employment data. During the last FOMC meeting, officials raised the U.S. economic growth rate for this year to 6.5% and expect the year-end unemployment rate to fall to 4.5%.

However, Jerome Powell also cautioned that while the U.S. economy is entering a period of rapid growth, the threat of the ongoing COVID-19 pandemic still looms, posing one of the black swans for the economy.