The US rates were left unchanged. This was as expected. The Fed recognised a ‘moderation’ in the pace of the US recovery in recent months and managed on balance to strike a note between vaccine optimism yet sufficient dovishness. It was decided that one month term repo ops wouldn’t be offered after February 09. However, the Fed stated that it was ready to adjust repo operations as appropriate. In the press conference after the statement Powell said that he considered real levels of unemployment to be closer to 10% in the US.

Bond tapering

One key aspect that was anticipated before the meeting was whether the Fed would mention anything on bond tapering. The consensus view was that this would be unlikely. Powell kept to the expected line and stated that it was. ‘too early to talk about tapering’. This reassured markets. Powell went a little further and said that more could be done with bond purchases. This was the right message for the market to hear and hit the right dovish notes.

Inflation

Powell said the Fed will not react to small and transient inflation rises. This is to avoid the scenario where markets start pricing in interest rate rises on the first sign of inflation. Investors will almost certainly do this anyway, but Powell is wanting to warn against that. There were no comments on the exact levels of inflation as you would expect, but Powell said he would ‘welcome’ higher inflation. That’s the sort of comment that can come back to bite you in the world of politics. However, in the context we are in, Powell simply means a little inflation would be good news rather than anything sinister around.

The bottom line here is that Fed is on hold.