The Federal Reserve is expected to keep its monetary policy in crisis mode when it concludes its final meeting on Wednesday, even if the economy improves.
The question now is how long it will be before the recovery is sufficiently advanced to stimulate the central bank to change course.
The Fed has kept rates near zero since March 2020 and is buying bonds at a pace of about $ 120 billion a month. These policies make many types of borrowing cheap and drive investors to riskier, more active investments – by allowing money to flow through the economic system and accelerating growth.
Fed officials are in no hurry to recall this support – even if coronavirus vaccines become widely available, the job market will heal and retail spending will rise, aided by government stimulus measures.
Instead, central bankers, including Fed Chairman Jerome H. Powell, have insisted that the economy is far from being completely healed. Millions are unemployed and the coronavirus is not entirely present in the US or worldwide. This threatens an uneven economic recovery and risks the spread of new variants
The federal Open Market Political Committee has announced that it will see “significant” progress towards its full employment and stable inflation goals before slowing monthly bond purchases. The hurdle for interest rate hikes is even higher: a return to maximum employment and inflation of more than 2 percent, which is expected to slightly exceed it for some time.
At their March meeting, central bank officials signaled that interest rates were likely to stay near zero through 2023 if the economy performed as expected. However, investors will be very focused on clues as to the way ahead when Mr. Powell holds a post-meeting press conference at 2:00 p.m. around 2:30 p.m. following the release of the committee’s statement.
“By the time of the June meeting, well over half of Americans should be partially vaccinated, and employment levels could be a few million higher than now, so the FOMC can discuss some noticeably improved results,” said Michael Feroli, chief executive of The US Economist at JP Morgan wrote in a research report. “For now, however, we think the committee’s message is unlikely to change from what it sent six weeks ago.”
However, the Fed’s commitment to patience – an approach that focuses on real, not just expected results – faces its first major challenge. With unemployment falling and inflation rising, two trends expected to emerge in the coming months, monetary policymakers are likely to be increasingly urged to recall their support to keep conditions from spiraling out of control.
But Mr Powell and colleagues have downplayed concerns about overheating and inflation warnings dating back to the 1970s and 1980s, arguing that the world has changed in recent decades.
“We had 3.5 percent unemployment in the last two years before the pandemic, which is a 50-year low,” Powell said in a recent 60-minute interview. “And inflation didn’t really react. This is not the economy we had 30 years ago. “