Contrary to recent angst among some investors, Asian markets largely accepted the higher inflation and growth forecasts for the US economy for this year and next and a lower-than-expected outlook for unemployment.
Except in Australia where the ASX 200 fell 0.7%, markets in Asia were in the green all day in a mostly positive reaction to the Fed news.
That’s despite inflation forecast to top the Fed’s 2% target rate this year, and US economic growth hitting a high of 6.5% this year, thanks to stronger demand and the impact of the $US1.9 trillion stimulus package.
The 6.5% forecast for GDP was up from the 4.2% forecast in December by the Fed.
The Fed said in its latest set of forecasts that it expects inflation to reach 2.4% in 2021, above its target of 2%, but expects inflation to fall back to around 2% in 2022. That was up from the 1.8% forecast for 2021 in the Fed’s December forecasts.
A couple of weeks ago the inflation forecast would have shaken nervy bond markets in particular, especially after Fed chair, Jay Powell playing down the forecast rise as “transient” and not meeting the Fed’s standard for a policy change (rate rise in this case).
The central bank also said it would continue to buy $US120 billion ($A155 billion) in bonds each month to keep longer-term borrowing costs down.
There had been speculation the Fed might have signalled an easing in the monthly bond purchases as a way of indicating its concerns about inflation.
The central bank sees the US unemployment rate falling to 4.5% by year’s – the December forecast was for unemployment of 5%.
That would mean that after all the stimulus spending from government ($US2.8 trillion in the last two packages from Congress) and the Fed, US unemployment rate will still be above the February 2020 Pre-Covid low of 3.5% by the end of this year.
