May 6, 2021

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Interest rates kept close to zero sees faster growth

Interest rates kept close to zero sees faster growth

The Federal Reserve on Wednesday refused to abandon its easy money policy despite an economy it recognized is accelerating.

As expected, the US central bank has decided to keep short-term interest rates pegged close to zero as it buys at least $ 120 billion worth of bonds each month. The last part of the policy is a two-pronged effort to support an economy that grew strongly in early 2021 and to support the functioning of the market at a time when 30-year mortgages are still hovering around 3%. .

Despite noticing economic strength and rising inflation, albeit only temporarily, the Federal Open Market Committee unanimously decided not to make any changes to its approach.

Fed Chairman Jerome Powell said the recovery is “patchy and far from complete”. Although he noted that inflationary pressures could increase in the coming months, these “occasional price increases are likely to have only transitory effects on inflation”.

Powell added that it is not yet time to talk about reducing political settlement, including asset purchases.

“It will take some time before we see any further substantial progress,” he said, repeating a phrase the FOMC used multiple times in its post-meeting statement.

The post-meeting committee statement found that efforts to combat the Covid-19 pandemic have helped boost the economy, although more needs to be done.

“Between advances in vaccinations and strong political support, economic activity and employment indicators have strengthened,” the committee said.

“The sectors most affected by the pandemic remain weak but have shown improvements,” he added. “Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, partly reflecting policy measures to support the US economy and credit flow to US households and businesses.”

The committee again noted that economic progress largely depends on the progress of the pandemic. The daily case count dropped significantly as the United States vaccinated nearly 3 million people a day.

“The ongoing public health crisis continues to weigh on the economy and risks to the economic outlook remain,” the statement said. At the March meeting, the same phrase included “employment” as an area where the crisis was having a negative impact, indicating that officials were noticing an improvement in the labor market.

The committee members unanimously decided to stick with politics.

In the statement, “the Fed offered no hint that it was considering slowing the pace of its asset purchases, let alone a rise in interest rates,” said Paul Ashworth, US chief economist at Capital Economics.

The decision comes the day before the Commerce Department releases preliminary first-quarter GDP data which is expected to show a 6.5% increase. Most economists, including those at the Fed, expect the United States to have its best full year since at least 1984.

Inflation was also on the rise, with March consumer prices rising 2.6% for the fastest year-over-year increase since August 2018.

Several companies during the current earnings season have mentioned increasing cost pressure. Procter & Gamble and other consumer brands have said they intend to raise prices as input costs rise, although others have said they will be able to absorb them.

Markets are currently pricing in a 5-year inflation rate of around 2.5%; a year ago, the level was below 0.8%.

Rising government bond yields, indicating higher inflation expectations, shook equities in March, but have remained stable 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. “Companies are good at managing all of this. They’ve already put mitigation strategies in place, and everyone is struggling with that.”

For its part, the Fed doesn’t care about inflation, at least for now.

Officials have repeatedly said they believe any impending price pressure attacks are likely to be temporary and ease after supply chain problems have eased and as weak year-over-year comparisons make the 2021 numbers less impressive.

The Fed is committed to allowing inflation to get warmer than its traditional 2% target while pursuing full and inclusive employment.

Goldman Sachs’ latest prediction is that inflation will remain around the Fed’s target until at least 2024. The company said it sees the rate, as viewed through the Fed’s preferred indicator, the basic personal consumption expenses, at 2.05% at the end of 2021, then 2%, 2.1% and 2.2% each year until 2024, respectively.

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