A dovish Federal Reserve attempted to reassure markets last night that interest rates will remain low for some time yet, regardless of improving economic recovery, and potential inflation. Despite some initial signs of success, market uncertainty appears to have remained this morning.

Federal Reserve Building
In good news for the US economy, the Fed revised their GDP forecast up to 6.5% for 2021. The stronger forecast comes courtesy of the success of the US vaccination program, and the $1.9 trillion stimulus package passed last week. The two measures are expected to see America open up more fully, and quicker than previously forecast, helping to further recover from the damage caused in the past 12 months.

Chairman Jerome Powell was keen to reaffirm that current policy is not changing in the near future. The Fed stated they are waiting to see actual improvements in the economy rather than relying on forecasts to inform policy changes. Interest rates are expected to remain low for a long time yet, and some analysts believe there may be no rises until 2023 or even beyond.

“When we see actual data coming in that suggests that we’re on track to perhaps achieve substantial further progress, then we’ll say so. And we’ll say so well in advance of any decision to actually taper.”

Powell confirmed some supply chain disruption and price rises, in a nod to the inflation fears that have been driving markets in recent weeks, but doesn’t believe inflation to be too much of a concern. This has been the message of choice for several months now from the Fed, and echoed by Treasury Secretary Janet Yellen.

In reaction to the new GDP forecast and reassurances of the Fed, stock markets had pushed higher initially, with new records for Dow Jones, S&P 500, and the DAX. This morning has shown signs however that the market disagrees with the Fed on their dismissal of inflations fears. 10-year Bond yields rose to a new 14-month high above 1.7%, as investors sold off the bonds once more.

180321 USD Gold Chart

Yields had dipped at first last night following the statement, pushing gold up to its highest this month at $1,755.87 per ounce. With yields now rising again, gold is back under pressure as well as stock markets.

The Bank of England has also come to a similar decision today, to keep interest rates at their historic lows of 0.1%. With a similar cautious optimism to the Fed, the BoE referenced the improving economic backdrop of the UK thanks to vaccination and the recent budget. The announcement last night of a month’s delay of 5 million vaccines however show there is still uncertainty to come. The delay will push back the vaccine rollout for many, and could draw out higher infection rates and the pace of lockdown if not resolved.

Central banks are having to walk a fine line between optimism over recovery, while remembering the need to keep fiscal policy loose to sustain that recovery. So far markets are welcoming the money printing efforts, but rejecting opinions on inflation. Who will prove to be right remains to be seen, and so far gold is largely caught in the same uncertainty, failing to sustain any rally, but still holding just above pre-pandemic levels.