The financial markets have reacted moderately to the decision by the US Federal Reserve (Fed) to keep key interest rates in the range between 0 and 0.25 percent and to stick to the policy of quantitative easing at the current level until there are substantial improvements in the labor market comes.

That apparently calmed the markets down, as did Fed Chairman Jerome Powell's assessment that the US economy grew more strongly in the second quarter than it has for many years.

Winand von Petersdorff-Campen

Business correspondent in Washington.

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Markus Frühauf

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The Fed meeting was followed with anxious attention by professional investors.

They had factored in the possibility that the central bank would send stronger signals to restrict the bond purchase program.

The Fed is increasing its bond portfolio month by month with government bonds of at least $ 80 billion and mortgage bonds of at least $ 40 billion.

In the press conference that followed the two-day Fed meeting on Wednesday evening, Powell limited himself to the announcement that he would regularly examine in future meetings whether the economic conditions for a program of this magnitude were still justified in view of the surprisingly strong economic recovery. If this is not the case, the first step could be to reduce the volume of bond purchases (“tapering”).

At the same time, Powell made it clear that the bond purchases had proven themselves as monetary policy instruments and that the economic data did not yet show the substantial progress that would prompt a reassessment of the program.

Powell also appears to have been successful in hedging central bankers who questioned buying mortgage bonds in the face of soaring real estate prices.

Investors expect the Fed and the ECB to continue their bond purchases

The yield on the trend-setting ten-year government bond, which is particularly sensitive to a possible change in the policy of quantitative easing, fell by 0.01 percentage points to 1.23 percent after the end of the Fed meeting. On Thursday it increased to 1.25 percent. In March, the return was still at 1.8 percent, when worries about inflation increased in the financial markets. However, these have subsided again, as the decline in yields shows. At minus 0.445 percent, the ten-year yield on the federal bond is as low as it was at the beginning of the corona pandemic in spring 2020.

The decline in yields on government bonds can also be attributed to the fact that investors now expect the bond purchases by the Fed and the European Central Bank (ECB) to continue. Last week, the Governing Council met these expectations and announced that it would leave interest rates at the current low level until the inflation rate has steadily leveled off at the target level of 2 percent. For the critics in the ECB Council - in addition to Bundesbank President Jens Weidmann, Austria's central bank president Robert Holzmann and Belgium's central bank governor Pierre Wunsch - the ECB has been too long in its interest rate outlook. Wunsch estimates the period at five to six years.

In the United States, too, after the latest Fed meeting, the conviction of an even longer expansionary monetary policy has apparently not been shaken, even if it is interpreted to mean that the central bankers are now looking more closely at tightening.

Powell has also made it clear that the surprisingly high price jumps will continue to be assessed as temporary and are also characterized by outliers from individual product groups such as cars.

The spread of the delta variant of the coronavirus is causing economic uncertainty, which has meanwhile prompted America's health authorities to take tightened protective measures.

"There was the expected result, just a little less looseness",

"At the moment, everything revolves around tapering at the Fed," is the comment of Daniel Hartmann, chief economist at Swiss asset manager Bantleon.

As a clear indication, he sees a new statement in the current Fed statement that the economy has made progress towards the Fed's goals (price stability and full employment) since December.

DWS economist Christian Scherrmann assumes that the reduction in bond purchases was most likely discussed very intensively at the July meeting.

However, this discussion remains theory for the time being.

Most of the Fed officials shared the view that it would take a few meetings to finalize the matter.

According to Scherrmann, the Fed is in no hurry, and some uncertainties still exist.

Johannes Mayr, chief economist at the asset manager Eyb & Wallwitz, spoke of good news for investors. Since the economic recovery is weakening, the importance of the tailwind from monetary policy is growing for the stock exchanges. BayernLB's interest rate strategists continue to believe that a decision to curb Fed bond purchases in the fourth quarter is likely. "It got the expected result, just a little less looseness," was the conclusion of John Vail, chief investment strategist at Japanese asset manager Nikko.

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