Fed keeps rates and bond purchases stable
By Paul Kiernan
WASHINGTON – The Federal Reserve has kept its key interest rate near zero and has said it plans to continue supporting the economic recovery, while acknowledging recent gains in growth and jobs.
Fed officials voted unanimously on Wednesday to maintain central bank policies, aimed at lowering borrowing costs, until the economy further recovers from the effects of the Covid-19 pandemic.
“Amid progress on vaccinations and strong political support, economic activity and employment indicators have strengthened,” the Fed said in a statement released after the conclusion of its two-day policy meeting. “The sectors hardest hit by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transient factors.”
The Fed has kept overnight interest rates near zero since March 2020, when the Covid-19 pandemic and related restrictions hit the economy hard. Since June, the central bank has also bought at least $ 80 billion in treasury bills and at least $ 40 billion in mortgage-backed securities to reduce long-term borrowing costs for consumers and businesses.
Fed officials have said they will keep rates stable until the labor market returns to full strength and inflation hits the central bank’s target of 2% on average. President Jerome Powell said those conditions are unlikely to materialize this year, and most Fed officials indicated last month that they plan to suspend the rate hike until 2024 at the earliest.
They also reiterated Wednesday that they wanted to see the economy make “further substantial progress” towards their targets for maximum employment and average inflation of 2% before starting to reduce the pace of bond purchases. Mr Powell recently clarified that officials have been measuring how the economy is going since December, when the Fed first released the guidance.
The economy has accelerated in recent months with rising vaccination rates, the easing of trade restrictions and the latest wave of federal stimulus funds that have fueled spending. Consumer confidence rose in April to its highest level in 14 months, the Conference Board said on Tuesday.
Economists polled by the Wall Street Journal expect hiring and inflation data to remain strong in the months to come as the vaccination campaign progresses, pushing economic growth to its fastest pace since 1983.
Fed officials stressed that they wanted to see the progress show up in economic data, rather than forecast, before raising rates or cutting bond purchases.
“We are only at the beginning to see this good data,” San Francisco Fed President Mary Daly said on April 16. “We’re going to need several months before we can distinguish optimism about the future from the realization. From the future.”
As more and more evidence of a rapid economic recovery emerges, officials will likely begin to indicate when and how they plan to cut Fed bond purchases. Mr Powell said he wanted to give a lot of warning before such a change.
His challenge will be to communicate the pivot while minimizing disruption in the financial markets.
The last time the Fed reported a reduction in asset purchases, in 2013, it sparked a bond market sell-off known as ‘taper tantrum’. A subsequent spike in Treasury yields rocked Fed officials who feared it would hurt the economic recovery from the 2007-09 recession.
Unlike that period, the economy is now expected to recover more quickly. Yields on US government bonds and some derivatives suggest investors believe the Fed will be able to start raising rates by 2023, sooner than most central bank officials have indicated .
Write to Paul Kiernan at [email protected]
(END) Dow Jones News Wire
April 28, 2021 2:15 p.m. ET (6:15 p.m. GMT)
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