Fed Officials Affirm to Keep Easy Monetary Policy Going

08 Apr 2021 · 3rd Party Analysis

Fed Officials Affirm to Keep Easy Monetary Policy Going

WRITTEN BY ThorFX

In Summary

  • Fed minutes lay out an optimistic outlook for the US economy
  • Fed officials vow to continue policy support as inflation risks are “broadly balanced”

The Federal Reserve released minutes from its March meeting which showed that policymakers remain confident that the economy will continue to grow without overheating after Joe Biden’s fiscal stimulus. Federal Reserve officials stated that they see no risk of an unexpected spike in inflation which has been a primary concern for investors since the approval of the $1.9tn stimulus package in early March.

According to the minutes from the meeting in mid-march released yesterday, the Federal Reserve pledges to keep its accommodative policy in place. During the meeting, policymakers said the current monetary policy will be changed only if Fed’s goals are achieved. The outcomes, expected by the central bank, including reaching maximum employment, a steady labor market, and stable prices.

The meeting summary signaled that while Fed officials expect the strong economic recovery to continue, they will not switch or unwind their ultra-accommodative monetary policy based solely on forecasts. Fed members vowed to continue their bond purchases of $120bn a month as they were “providing substantial support to the economy.”

“Participants noted that it would likely be some time until substantial further progress toward the committee’s maximum-employment and price-stability goals would be realized and that, consistent with the committee’s outcome-based guidance, asset purchases would continue at least at the current pace until then,” the minutes said.

Inflation Fears Dismissed

Policymakers shrugged off growing inflation fears that have been causing jitters in the stock market over the last month. “Most participants noted that they viewed the risks to the outlook for inflation as broadly balanced,” the meeting summary mentioned.

However, some of the 18 participants in the March 16-17 meeting forecast that the pent-up demand “could push up price inflation more than anticipated.” At the March meeting, following Joe Biden’s pandemic relief package that was signed into law on March 11, Fed officials were prompted to revise upward the central bank’s forecast for growth and inflation. The committee substantially raised its projections for economic expansion. The outlook for GDP in 2021 now stands at 6.5%, revised upward from the 4.2% forecast in December.

The meeting in March took place in a rising borrowing costs environment, which at the time, rattled investors who expected the Fed to switch its policy to limit the rise in bond yields. The 10-year Treasury note yielded 1.78% at its high, up almost double since the start of the year. The yield has subsided now and is below 1.65%. A rising yield indicates falling demand for Treasury bonds, which means investors are flocking to riskier assets with higher returns.

“Participants commented on the notable rise in longer-term Treasury yields that occurred over the intermeeting period and generally viewed it as reflecting the improved economic outlook,” the minutes said. Nevertheless, committee members noted that if the trend in Treasury markets continued, it could

have a detrimental effect on Fed’s goals. “Disorderly conditions in Treasury markets or a persistent rise in yields that could jeopardize progress toward the committee’s goals were seen as cause for concern.”

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