Fed resolution in January 2021: rates of interest unchanged

A Federal Reserve Police officer walks past Marriner S. Eccles’ Federal Reserve building in Washington, DC, United States

Andrew Harrer | Bloomberg | Getty Images

The Federal Reserve on Wednesday kept its foot on the ground regarding aid it is providing to an economy that central bank officials say it has slowed.

In line with market expectations, the Federal Open Market Committee said it had anchored its short-term benchmark interest rate near zero and maintained an asset-buying program that saw the Fed buy at least $ 120 billion a month.

At the center of efforts to keep politics historically accommodative has been an economy in which the sectors most vulnerable to the pandemic are hardest hit.

“The pace of recovery in economic activity and employment has slowed in recent months, with weakness focusing on the sectors hardest hit by the pandemic,” the committee said after the meeting.

The statement reiterated that Covid-19 is “causing enormous human and economic hardship”
in the United States and around the world. “

Otherwise, the committee left the statement unchanged, apart from its position that growth will depend on the pandemic.

“The way the economy goes will depend largely on the course of the virus, including progress on vaccinations,” the statement said.

The decision means that the Fed Funds Rate, which serves as the benchmark for a wide variety of consumer debt, will remain anchored in a range between 0% and 0.25% and was most recently trading at 0.08%.

The Fed brought the key rate to zero in the early days of the Covid-19 pandemic and has kept it there ever since. In recent months, officials have made their low interest engagement even more aggressive, promising not to start hiking even if inflation hits or slightly exceeds the central bank’s 2% target.

Markets watched, however, whether the statement would suggest the future of asset purchases or quantitative easing. Since the beginning of the coronavirus crisis, the Fed has expanded its holdings by more than $ 3 trillion and increased its balance sheet to nearly $ 7.5 trillion.

Although inflation remains low for the moment, investors fear that the Fed may unexpectedly curtail purchases if conditions change and cause market turmoil. The statement did not provide any new guidance on the matter, so market participants will look to the meeting after Chairman Jerome Powell’s press conference for more details.

Fed officials remain cautious in an economy that has rebounded in two directions, with earners in the upper income brackets doing well and lower earners, particularly service workers, doing badly. This inequality has provided much of the impetus for the Fed’s flexible average inflation target regime.

As part of the approach, the Fed will no longer raise interest rates in anticipation of inflation, but will tolerate higher rates in the interests of a broader recovery. In the past, when the unemployment rate fell to levels compatible with what appeared to be full employment, the Fed introduced preventive increases to halt inflation.

The current economy is showing conflicting signs of inflation, with housing and material costs rising and service inflation falling.

From a macro point of view, the economy grew strongly overall in the fourth quarter, although activity slowed towards the end of the year. The Commerce Department released fourth quarter GDP on Thursday and expects an increase of 4.3%, according to economists polled by Dow Jones. On Friday, the Fed’s preferred inflation meter, the deflator for personal consumption expenditure, is expected to see a core year-over-year increase of 1.3%.

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