The answer to the half full-half empty question is, according to Mikael Olai Milhøj: it depends. On one hand, the glass can be seen as half empty. The updated projections showed that the Fed expects to maintain the current target range at 0.00-0.25% at least through 2023 and will continue to buy bonds “at least at current pace”. In other words, the Federal Reserve has no intention tightening monetary policy anytime soon. Still, it was not enough to maintain market optimism.
“It seems fair to assume that the Federal Reserve will increase the buying pace in case we see a setback in the recovery, a significant risk-off in markets and/or inflation expectations start to fall. This may even happen in-between meetings given the flexible nature of the Fed’s QE programme,” Mikael Olai Milhøj says.
Actions speak louder than words
On the other hand, the glass can be seen as half empty. The Federal Reserve had a great opportunity to show its determination in creating inflation and achieving its new goal by increasing the bond buying pace. “Words mean a lot in monetary policy, but actions still speak louder. It is difficult to build credibility and it would be a very strong signal if the Fed had gone the extra mile,” Mikael Olai Milhøj says.
Overall, the senior analyst sees the lack of further easing as unfortunate, because economic research shows that monetary policy is more efficient if easing comes fast and forceful: “the more you do now, the quicker you can also get out again.”