The U.S. Federal Reserve held its benchmark interest rate and its monthly bond-buying program steady on Wednesday, as widely expected, while acknowledging the strength in the U.S. economy but giving no signs it was ready to start reducing its support for the recovery.
Fed Credits Vaccinations, Policy for Strengthening Economy, Employment
“Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” the U.S. central bank said in a unanimous policy statement at the end of a two-day meeting.
Fed Continues to See Risks
Despite the improvement, Fed policymakers still see risks to the economy. “The path of the economy will depend significantly on the course of the virus, including progress on vaccinations,” the Fed said. “The ongoing public health crisis continues to weigh on the economy and risks to the economic outlook remain.’
Fed Dampens View on Coronavirus
The Fed changed the language about the coronavirus in April’s statement, reflecting a slightly less negative view than the Fed’s description in March, when it said the health crisis “poses considerable risks to the economic outlook.”
Fed Reiterates Guidance
Despite acknowledging the gains in the economy, Fed policymakers reiterated the guidance it has followed since December, setting the list of conditions that must be achieved before it considers pulling back from the emergency support put in place to stem the economic fallout of the pandemic in 2020. That includes “substantial further progress” towards its inflation and employment goals before stepping back from its monthly bond purchases.
Mixed Market Reaction
Ahead of the release of the Fed’s monetary policy statement, investors and analysts weren’t expecting any major changes from the Federal Reserve, and the initial reaction in the financial markets was subdued. Stocks were flat, yields were slightly higher and the dollar was capped.
Time Will Tell
Since the last Fed meeting in March, U.S. job growth has surged and inflation has risen. Nonetheless, the economy remains more than 8 million jobs short of where it was before the pandemic forced whole industries to shut down in an effort to control the spread of the virus. Furthermore, policymakers will allow inflation to overshoot the 2% benchmark.
Overtime, conditions are expected to improve further which will offer the Fed the opportunity to begin trimming its $120 billion in monthly bond purchases. This will eventually lead to policymakers lifting overnight interest rates from the current historically low levels.
The Fed will maintain current levels of economic aid, but the economy’s prospects will also be contingent on continued progress in managing the pandemic.