Fed maintains easy monetary policy; keeps interest rates near zero

Updated : March 18, 2021 12:03:53 IST

Fed Chair Jerome Powell kept overnight interest rates unchanged at 0-0.25 percent even as he expected growth to pick up.

He vowed to maintain an easy stance until the Fed nurses the US economy back to health.

The economy is a long way from our employment and inflation goals, he said, and it will take time to reach there.

The US Federal Reserve kept overnight interest rates unchanged at 0-0.25 percent, with Fed Chair Jerome Powell saying he expected growth to pick up.

Powell dismissed chatter that the Fed may slow down its asset purchases. Fed currently spends $120 billion in Treasuries and mortgage-backed securities.

“We will continue to provide the economy the support it needs for as long as it takes,” he said as the FOMC meet ended on Wednesday.

The economy is a long way from our employment and inflation goals, he said, adding it would take time to reach there. “We’re still a long way from our goals, and it’s important that financial conditions do remain accommodative to support the achievement of those goals,” Powell said.

Projections Data

The Fed also said it expects the economy to recover quicker than expected, based on the projections data released on Wednesday.

GDP

The central bank raised the forecast for key economic indicators on Wednesday. GDP is likely to touch 6.5 percent this year, and the core inflation might reach 2.02 percent. Even then, Fed will maintain its near-zero interest rates till 2023, Powell said. Only seven out of the 18 policymakers expect lifting rates in 2023.

Inflation

The Fed gave up its long-standing strategy to raise interest rates as a counter against rising inflation. Instead, it will now keep the inflation above 2 percent for a long time. It did not signal how long, though. But the current inflation projections show inflation rising to 2.4 percent in the last quarter of 2021.

Employment

US labor market has shown improvement in 2021. The unemployment rate eased from 6.3 percent in Jan to 6.2 percent in Feb ’21. Though it is still well above the 3.5 percent level of Feb ’20. The Fed expects the unemployment rate to further ease to 4.5 percent this year and then to 3.9 percent in 2022.

These forecasts underscore the Fed's commitment to achieve goals of maximum employment and sustained inflation, Powell said.

He expects the stimulus packages and vaccination drive to fuel recovery sooner than later. Their collective impact, combined with the Fed’s easy money policy, may propel the US economy to the fastest expansion since the early 1980s, WSJ reported.

But some analysts worry consumer spending spurred by packages may widen the supply-demand gap. Businesses' inability to meet demand might lead to a surge in prices, they said. But Powell believes pickup in prices would likely be temporary. And likely wouldn't be enough to meet the Fed’s bar for raising rates.

The markets cheered Powell's statements, with stocks rallying and erasing previous losses. US treasury yields also fell from their earlier highs. While Powell is concerned about the “disorderly” market conditions, he believes current bond prices are in an appropriate range.

“If you look at various indexes of financial conditions, what they do show is financial conditions overall to be highly accommodative, and that is appropriate,” he added.

Published : March 18, 2021 10:59 AM IST

Fed maintains easy monetary policy; keeps interest rates near zero

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