Fed Keeps Rates on Hold Despite Signs of Improving Economic Recovery

By Yasin Ebrahim

Investing.com – The Federal Reserve left rates unchanged Wednesday, and appears to be in no rush to rein in its accommodative stance even as vaccine rollouts and fiscal stimulus have bolstered the recovery.

The Federal Open Market Committee left its benchmark rate unchanged in the range of 0% to 0.25% and maintained its monthly pace of bond buying at $120 billion.

"Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement," the Fed said in a statement.

Despite the improving economic backdrop and faster pace of reopening, the pandemic continues to weigh on the outlook, according to the Fed. "The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain."

In the press conference that followed the policy statement, Fed chairman Jerome Powell continued to signal that the current stand on policy will remain steady for some time.   

"We continue to expect it will be appropriate to maintain the current zero to one quarter percent target range for the federal funds rate until labour market conditions have reached levels consistent with the committee's assessment of maximum employment and inflation has risen to 2%, and is on track to moderately exceed 2% for some time."

Still, market participants remain wary of an unexpected shift in the Fed's policy. Incoming economic data continue to point to a robust recovery as inflation steps up pace.

The 10-year inflation "breakevens,” a key measure of inflation expectations over the next decade, topped 2.4% on Tuesday, the highest level since April 2013. The PCE index, the Fed's preferred inflation measures, was at 1.6% for February.

The central bank has not turned a blind eye to the increasing pace of inflation, but continues to suggest the post-reopening boom in inflation will be short-lived, or transitory. "Inflation has risen, largely reflecting transitory factors," the Fed said in a statement.

"[W]e are likely to see some upward pressure on prices and but those pressures are likely to be temporary as they are associated with the reopening process and one-time price increases as the economy reopens," Powell said. "It is not likely to lead to persistently higher year over year inflation into the future," he added. 

On the labor market, the Fed chief said the economy is a "long way from full employment" as unemployment remains above pre-pandemic levels. "We've got a long ways to go," Powell added.