Fed Chair Reaffirms Support to Economy, No Change to Policies

29 Apr 2021 · 3rd Party Analysis

Fed Chair Reaffirms Support to Economy, No Change to Policies

WRITTEN BY ThorFX

In Summary

  • Federal Reserve will continue to provide same-level support to the US economy
  • Fed’s Jerome Powell not concerned about inflation pressures

Federal Reserve Chairman Jerome Powell painted a brighter picture of the US economic recovery yesterday. In a press conference after the conclusion of the two-day FOMC meeting, Mr. Powell showed no signs the central bank would change its monetary policy at least for the foreseeable future.

Contrary to investors’ expectations that the Fed would budge after a string of positive economic reports, Chairman Powell reiterated the Federal Reserve is still “a long way” from unwinding monetary support. “We’re a long way from our goals,” the Chairman said, referring to the Fed’s goals of full employment and 2% inflation target.

He also praised the latest monthly non-farm payroll data which showed nearly 1 million jobs were added to the labor market for March. But he also said the Fed is “going to act on actual data,” not a forecast when it comes to withdrawing monetary support. “We’ve had one great jobs report, it’s not enough,” he commented, while he reaffirmed the Federal Reserve will maintain its ultra-loose monetary policy with interest rates near zero and debt purchases steady at $120bn a month.

“If we see inflation moving materially above 2% in a persistent way that risks inflation expectations drifting up, then we will use our tools to guide inflation and expectations back down to 2%,” Jay Powell said, addressing the looming fears that rising prices could cause the economy to overheat. “No one should doubt that we will do that.”

Fed’s Policy Prove Critical for the Economy

While some economists expected the Fed chair to hint the central bank could consider unwinding its monetary support as soon as the next meeting, Jerome Powell highlighted that for the asset purchases to be reduced, the economy should make “substantial further progress”. There are still more than 8.4 million jobs less in the US economy compared with pre-pandemic employment levels.

Since the onset of the pandemic in March 2020, the Federal Reserve has held the overnight rate at 0.25% to hold down borrowing costs and allow the economy to recover. In addition, since June, the central bank has been buying Treasury bonds worth at least $80bn and another $40bn of mortgage-backed securities per month.

Fed’s approach to the pandemic-stricken economy has led to a strong and swift rebound in economic activity. Economic recovery has also been underpinned by a strong vaccination campaign across the states and the easing of business and social restrictions. Combined with massive federal stimulus, consumer confidence for April rose to the highest level in 14 months.

However, against the backdrop of strong economic growth, inflation has also accelerated, and that has been causing stock market jitters. The consumer price index jumped 2.6% for March on an annual basis, compared with 1.7% for the month before, also on an annual basis. The Fed’s 2% inflation target is based on a different instrument, the personal consumption expenditures index (PCE), which is projected to rise from 1.6% in February to 2.4% by the end of the year.

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