— This is the script of CNBC's news report for China's CCTV on June 17, 2021, Thursday.
To sum up the FOMC meeting, the Fed signals tightening intension without causing a panic in the market. There are several important takeaways. First, the Fed raised the forecast of GDP growth of the United States this year to 7% from 6.5%, and the policymaker upgraded inflation projection to 3.4% from 2.4%, a response to the rising inflation data we have recently.
Based on these forecasts, the newly released so-called dot plot, a tool tracking individual FOMC member's expectations on rates, showed that 13 members believe the Fed will increase interest rates in 2023 and the majority of them believe the central bank will hike at least twice that year. Seven of the 18 members see the Fed possibly raise rates as early as next year.
This is the most "hawkish" signal from the meeting, which means that the Fed may hike rates earlier-than-expected and also faster. In the last meeting, most committee members expected the Fed to only start raising rates in 2024. That being said, the dot plot is not a decision but a reference. And Fed chairman Powell also played down its significance.
Chair of the Federal Reserve of the United States
"The dots are not a great forecaster of future rate moves. It's because it's so highly uncertain. There is no great forecaster, dots to be taken with a big grain of salt."
But the market still reacted quickly to the hint. The three major indexes dropped after the meeting and had a volatile trading session before ending lower. The dollar index climbed, but gold slipped.
However, there was no panic in the market, because the Fed didn't give any near-term guidance. With regards to tapering, Mr. Powell said that the Fed will inform the market once they make a decision on timing. Kathy Jones, head of fixed income at Charles Schwab, told us that the Fed will have to start tapering fairly soon to get two rate hikes in 2023. "It takes maybe 10 months to a year to taper at a moderate pace. Then you're looking at we need to start tapering maybe later this year".
Inflation figures and growth data in the next few months will be critical. If the U.S. economy and inflation continue to show signs of overheating, the Fed may need to start tightening its policy even earlier. It will impact global cash flows, especially for emerging markets. It's reported that many Asian central banks have been stocking foreign reserves in case of any unexpected moves from the Fed.