The Fed keeps interest rates close to zero, sees faster growth and higher inflation
The Federal Reserve on Wednesday declined to abandon its loose monetary policy despite an accelerating economy.
As expected, the US Federal Reserve decided to keep short-term interest rates near zero as it purchases at least $ 120 billion worth of bonds every month. The final part of the policy is a two-pronged effort to support an economy that has grown strongly by early 2021 and to help the market work at a time when 30-year mortgages are still around 3% .
Despite finding economic strength as well as inflation rising, if only temporarily, the Federal Open Market Committee has unanimously decided not to change its approach and has given no indication that things will change anytime soon.
Fed chairman Jerome Powell said the recovery was “uneven and nowhere near complete”. While he noted that inflationary pressures could rise in the coming months, these “one-off price increases are likely to have only a temporary impact on inflation”.
Powell added that it still isn’t time to talk about reducing policy accommodations, including asset purchases.
“It will be some time before we see significant further progress,” he said, repeating a phrase that the FOMC used repeatedly in its post-meeting statement.
The committee’s statement after the meeting noted that efforts to fight the Covid-19 pandemic have helped boost the economy, although more needs to be done.
“Given the advances in vaccination and strong political support, indicators of economic activity and employment have strengthened,” said the committee.
“The sectors hardest hit by the pandemic are still weak but have improved,” he added. “Inflation has risen and is largely a reflection of temporary factors. Overall financial conditions remain accommodative, partly due to policies to support the economy and the flow of credit to US households and businesses.”
The committee reiterated that economic progress largely depends on the course of the pandemic. The daily case numbers have dropped significantly as the US vaccinated nearly 3 million people every day.
“The ongoing public health crisis continues to weigh on the economy and risks to economic prospects remain,” the statement said. At the March meeting, the same sentence included “employment” as an area negatively affected by the crisis, indicating that officials are seeing an improvement in the labor market.
The members of the committee unanimously agreed to maintain the policy.
In the statement, “the Fed gave no indication that it would consider slowing down the pace of asset purchases, much less considering hike rates,” said Paul Ashworth, US chief economist at Capital Economics.
The decision will be made the day before the Commerce Department releases preliminary Q1 GDP figures, which are expected to grow 6.5%. Most economists, including those at the Fed, expect the US to have its best full year since at least 1984.
Inflation has also increased. Consumer prices in March rose 2.6%, the fastest increase since August 2018 year over year.
Several companies have mentioned rising cost pressures during the current earnings season. Procter & Gamble and other consumer brands have announced that they will raise prices as input costs rise, but others have announced that they will be able to absorb them.
The markets are currently anticipating a five-year inflation rate of around 2.5%. a year ago the value was below 0.8%.
Rising government bond yields, indicating higher inflation expectations, rocked stocks in March, but they have held steady since then.
“The market doesn’t like uncertainty. We have uncertainty about corporate taxes, we have uncertainty about interest rates, we have uncertainty about supply chain disruptions and cost inflation,” said Rebecca Corbin, CEO of Corbin Advisors. “Businesses are good at coping with this. They have strategies in place to limit the damage and they are all struggling.”
For its part, at least for now, the Fed is not concerned about inflation.
Officials have repeatedly stated that they believe that impending price pressures are likely to be temporary and will subside once supply chain problems subside, and weak year-over-year numbers make 2021 numbers less impressive.
The Fed is campaigning for inflation to be higher than its traditional 2% target as it seeks full and inclusive employment.
Goldman Sachs’ latest forecast suggests inflation will stay around the Fed’s target through at least 2024. The company expects the key rate, as measured by the Fed’s favorite indicator, the personal consumer spending price index, to be 2.05% by the end of 2021, then 2%, 2.1% and 2.2% each year through 2024 .
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