The Federal Reserve plans to remain in a holding pattern with regard to interest rates. As was widely expected, at the conclusion of the Federal Open Market Committee meeting held March 16-17, the Fed announced that it would not likely raise rates until 2023.
The announcement came with recognition that the economy is showing signs of strength and inflation is higher. The Fed forecast US GDP growth could be 6.5% this year, and inflation is above its 2% target rate.
Still, the Fed noted that the sectors of the economy that have been most adversely affected by the pandemic remain weak. In a press conference after the meeting concluded, Fed Chair Jay Powell noted, “economic recovery remains far from complete.”
Inflation not a worry for the Fed
Inflation does not appear to be a concern for the Fed. It projected inflation would slow to 2% in 2022, then increase slightly to 2.1% in 2023. A level of inflation slightly above its target rate appears to be tolerable to make up for the years that inflation had been below 2%.
Some analysts suspected the Fed might signal a timetable, or at least a willingness, to begin tapering its asset-purchase program. While the Fed said it will continue to watch for any economic signs that it should modify its accommodative monetary stance, it did not currently see reasons to change its policy.
It plans to keep the federal funds rate at 0 to 0.25% and continue its $120-billion monthly purchase of Treasuries and mortgage-backed securities. It said it will likely continue to be accommodative until the labor market picks up and approaches maximum employment and until inflation looks to be on track to remain moderately above 2% for some time.
The Fed did note the course of COVID-19 and progress with vaccines will determine the pace of the economic recovery.
While the $1.9-trillion stimulus package that Congress passed this month should do much to bolster the economy, some analysts think additional stimulus may still be needed to address the continuing effects of the pandemic.
Before the meeting, there was also some expectation that the Fed might announce plans to deploy Operation Twist. It’s a technique the central bank has relied on in the past to stimulate the economy and keep long-term rates low by selling short-term notes and buying long-term bonds. Given that the Fed made no mention of resorting to this approach, long-term rates are likely to continue climbing higher.
Bond market seems more worried about inflation
While the Fed does not see inflation as a problem, the bond market apparently is concerned. The yield on 10-year Treasuries rose on Thursday, March 18, as investors seemed uncomfortable with the Fed’s willingness to let inflation this year move higher than its 2% target rate.
The market’s concern could eventually lead the Fed to tighten monetary policy.
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Tags: Inflation, Interest rates