Fed on hold in first policy meeting under Biden administration

The Federal Reserve kept its key policy tools on hold today (January 27), in its first meeting since Joe Biden took up the US presidency.

The federal funds rate remains at 0–0.25% and the Fed will continue buying assets at a rate of $120 billion a month. The Fed’s total assets reached $7.4 trillion on January 18.

In the post-meeting press conference, Fed chair Jerome Powell said the central bank had already deployed “forceful actions to provide relief and stability”. He added the Fed would continue to provide “powerful support to the economy until the recovery is complete”.

In its policy statement, the Fed restated its forward guidance. It said asset purchases would continue until “substantial further progress” had been made towards the goals of maximum employment and stable prices. Rates will stay where they are until inflation is on course to “moderately exceed” the 2% target for “some time”.

Powell said base effects and a possible “burst of spending” as pandemic lockdowns ease could trigger some inflation, but the Fed expects this to be “transient”, so policy is unlikely to react. Headline PCE inflation was 1.1% in November, down from 1.2% in October.

“Of course if we did get sustained inflation … we have tools for that,” said Powell.

The meeting saw several policy-makers take up voting positions on the Federal Open Market Committee. New Fed governor Christopher Waller, former research director of the St. Louis Fed, cast his first FOMC vote this week.

The meeting also marks the introduction of four new voting members from the regional reserve banks: Raphael Bostic of Atlanta, Charles Evans of Chicago, Thomas Barkin of Richmond and Mary Daly of San Francisco.

FOMC members voted unanimously to keep policy on hold.

The latest data shows a generally stable US economy, albeit one struggling to recover from the Covid-19 shock of 2020. The IMF’s World Economic Outlook for January 2021 predicted that the US economy would grow by 5.1% this year, and 2.5% in 2022, after an estimated contraction of 3.4% last year.

The Department of Labor recorded 6.7% unemployment in December 2020. However, the economy shed 140,000 jobs between November and December; the department also recorded 900,000 new unemployment claims for the week ending January 16, and 926,000 claims for the preceding week.

More fiscal stimulus?

The Biden administration, which took office last week, has proposed a $1.9 trillion stimulus package, which includes $1,400 cheques for most US residents, supplemental unemployment insurance, $350 billion in aid to state and local governments, and an increase in the federal minimum wage to $15 per hour. The Biden plan follows a smaller, $900 billion package approved in December 2020, which provided $600 payments.

So far, the legislation has won no Republican support, leading to concerns that the package might be blocked in the Senate.

Powell backed stimulus legislation in remarks last year, as did Eric Rosengren, president of the Federal Reserve Bank of Boston.

Speaking in October, Powell warned that too little policy support “would lead to a weak recovery” and could inflict “unnecessary hardship” on households. He restated that position today, saying federal stimulus payments and unemployment insurance had provided “essential support”, adding “we’re a long way from a full recovery”.

However, the Fed chair said it was down to Congress to determine the appropriateness of any further stimulus.