- Although the Fed projected the US economy to grow by a remarkable 6.5% this year (rival China’s 6% growth target) and core inflation is also expected to exceed 2% this year (right at the upper margin of The Fed’s target), Jerome Powell asserted that zero interest rates and quantitative easing will continue for a reasonably long time.
- This remarkably dovish statement has sent a very clear signal that The Fed is now ready to accept a certain degree of higher inflation for a longer period of time. Markets roiled by recent yield spikes were largely calmed by the Fed’s assertion.
- However, based on the Fed’s dot plot, the numbers of Fed board members expecting rate hikes in 2022 and 2023 continue to rise over time. This does raise concerns over how well Powell’s “loose inflation” commitments hold up with the other members of the board.
- These concerns are more pronounced outside the US, where the general pace of vaccinations and economic recovery tend to be slower. BI’s decision to hold rates steady at 3.50% is likely to reflect such concerns.
- Forwardly, Bank Indonesia (BI) is likely to pursue monetary expansion without fiddling too much with rates, such as enacting macro-prudential policies. Loosening loan to value (LTV) ratio of mortgages and the gradual re-imposed of penalties for banks failing meet their financing-to-funding ratios (RIM), are the two examples of BI's efforts to boost liquidity without cutting interest rates.
