In its first meeting for 2021, and its first one during the Biden administration, the Federal Reserveâs rate-setting body voted to hold its target interest rate steady in the 0% to 0.25% range.
This means there is not likely to be much upward movement in variable credit card interest rates, which are typically tied to the Fedâs target interest rate, or the fed funds rate.
The Fed will also continue with its purchases of at least $80 billion in Treasury securities and $40 billion in agency mortgage-backed securities every month to further support the economy.
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In a media release, the Federal Open Market Committee said, âThe pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.â
The course of economic growth will depend on how effectively the pandemic is reined in, including with the use of vaccinations. Meanwhile, the Fed will aim to maintain its almost 0% target rate until it deems the economy to have attained âmaximum employmentâ and inflation outpaces its 2% target for a while.
The Fedâs aim is for inflation to overshoot its 2% target for a while so that average inflation remains around 2%, considering that inflation has been running below target for several years now.
In a related press conference, Fed Chairman Jerome Powell noted that there are positive signs for the economy going forward, and a number of forecasts call for a stronger economy in the second half of the year because of vaccine rollouts and fiscal stimulus. He expects that âwidespread vaccinations would enable us to putÂ the pandemic behind us.â
Powell added that thereâs ânothing more important to the economy right now than people getting vaccinatedâ since that will enable everyone to get back to work. He himself has had his first vaccination shot and expects to be getting a second one soon, he mentioned.
However, he sees the pandemic as still presenting âconsiderable downside riskâÂ to the economy considering that no one knows how the vaccination rollout will go. Given this, the Fed has set its policy to be accommodative until it actually sees economic improvement.
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Full employment recovery a long way off
Considering that the shock from the pandemic âwas unprecedented both in terms of its nature and its size,â in modern history, the economy is still at least nine million jobs short of maximum employment, according to Powell. He also noted that the real unemployment rate is at least 10% taking into account people who have dropped out of the labor force.
He is concerned about any potential long-term damage from unemployment to people, which will ultimately prevent the U.S. economy from achieving its full productive potential.
Powell also pointed to racial disparities in terms of employment gaps, wealth gaps and home-ownership gaps that âeven controlling for many other factors, theyâre persistent and difficult to explain.â Broader prosperity for everyone is important since the Fed wants the âpotential output of the economy to be as high asÂ possible.â
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Fed doesnât see transient inflation rise as a threat
Although there could be a rise in inflation as the economyÂ reopens, Powell expects this to be transient and not âtroubling inflation.â The world has been facing âdisinflationary pressuresâ for a while now, and Powell is more concerned about any damage to people and the economy from tightening its monetary policy too soon than about fighting off the possibility for higher inflation.
He also doesnât see risks to financial stability as high, based on asset prices and the use of debt by the banking system, businesses and households. News about vaccines and fiscal policy is what is driving asset prices, as he sees it.
Itâs premature for the Fed to think about rolling back its securities purchases and start being less accommodative, according to Powell. The Fed has learned a lot from its experience after the global financial crisis and the âtaper tantrumâ that ensued after it decided to start tightening its monetary policy during that recovery.
Accordingly, it will communicate its policy stances well in advance and be transparent this time around. âItâs too soon to be worried. When it comes (time) to exit, we know how to do that,â Powell said.