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Investing.com – The Federal Reserve kept interest rates and its monthly pace of bond buying unchanged Wednesday, even as it acknowledged an improved economic backdrop as vaccine roll outs gather pace.
The Federal Open Market Committee left its benchmark rate unchanged in the range of 0% to 0.25% and said it would continue its $120 billion monthly bond purchases.
Rates have been close to zero since March last year, when the onset of the Covid-19 pandemic forced the central bank into action to cushion the economic fallout.
Financial crisis-era tools such as the bond buying program, or quantitative easing, were resumed to keep a lid on rates and stave off any potential credit crunch that would slow lending activity.
The Fed’s efforts have been helped by a wave of unprecedented pandemic fiscal relief measures rolled out by the U.S. government. The latest fiscal relief package, the $1.9 trillion American Rescue Plan, together with the faster pace of vaccine roll outs have added fuel to the recovery.
But the improving economic backdrop has sparked inflation and U.S. bond yields into life, stoking speculation over whether the Fed will have to tighten policy sooner than expected.
The Fed’s previous projections in December, suggest rates will remain unchanged through at least 2023.
The 10-year inflation “breakevens,” a key measure of inflation expectations, are pricing in average annual inflation of about 2.3%, the highest since July 2014, while the PCE index, the Fed’s preferred inflation measure, was at 1.5% for January. That’s below its target to keep inflation above 2% for some time.
The Fed, however, believes the post-reopening inflation boom will be short-lived, and favors incoming economic data rather than expectations to lead its future monetary policy decisions.
“For asset purchases, they’ll continue at least at the current level, until we achieve substantial further progress toward our goals. That’s actual progress, not forecast progress,” Federal Reserve Chairman Jerome Powell said at the virtual Wall Street Journal Jobs Summit on March 4.
The second part of the Fed’s dual mandate – to achieve maximum employment – has also justified its accommodative stance somewhat as the unemployment rate at 6.2% remains above pre-pandemic levels.
Traders are expected to shift attention to Fed Chairman Jerome Powell’s press conference at 2.30 p.m. ET, for more clues on future monetary policy action.
