Fed plays down US economic rebound

The Federal Reserve held its monetary policy steady today (April 28), emphasising in a statement that the US economy is not yet ready for stimulus to be withdrawn.

During the post-meeting press conference, chair Jerome Powell said the economy remained a “long way from our goals”. He added: “It is likely to take some time before substantial further progress is achieved.”

Powell dismissed the possibility of tapering asset purchases any time soon, and said any change to the purchase programme would be signalled well in advance.

The Federal Open Market Committee decided to maintain the policy rate in the range of 0–0.25% and continue quantitative easing at the rate of $120 billion per month. The committee has kept the federal funds rate at this level since March 2020.

“Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak,” the FOMC said today.

According to the minutes of the March 2021 meeting, FOMC participants indicated that they did not expect to raise the federal funds rate before the first quarter of 2023.

Headline PCE inflation was 1.6% in February, according to the Bureau of Economic Analysis. This remains below the Fed’s 2% target and short of the central bank’s stated aim of pushing inflation “moderately above” the target to correct for the past shortfall.

In previous meetings this year, the FOMC has said that it expects a brief, temporary increase in inflation over the Federal Reserve’s 2% target, and Powell restated this position today. He highlighted base effects from low inflation early in the pandemic, combined with higher energy prices, as temporary factors that will likely push inflation up.

Powell said a “transitory” rise in inflation would not be sufficient to trigger a tightening of monetary policy. He added it seemed unlikely that higher inflation in the short term would lead to persistently higher inflation expectations.

Some weakness also persists in the labour market. The most recent US unemployment report, for March 2021, gave an unemployment rate of 6%. This figure was down from 6.2% in February. The Bureau of Labor Statistics cautioned that unemployment was still well above the pre-pandemic level of 3.5%.

The BLS figures also showed that Black and Hispanic workers faced higher-than-average unemployment. The FOMC has previously observed that the economic downturn due to Covid-19 had fallen disproportionately on Black and Hispanic households.

Powell said today that economic scarring through long-term job losses had been a “big concern” for the Fed. The US economy had avoided some of the worst scenarios the central bank had envisaged in 2020, he said, but “we’ve still got a lot of people out of work, we want to get them back to work as quickly as possible”.

The US Congress passed a $1.9 trillion stimulus package, the American Rescue Plan, in March 2021. This stimulus follows the Cares Act of March 2020 and a $900 billion stimulus passed in December.