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14th May 2022

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Fed paints rosier picture of US economic recovery

The Federal Reserve upgraded its view of the US economic recovery, but kept interest rates close to zero and showed no signs of moving to remove support for the economy.

At the end of a two-day meeting, officials noted the improvement in the economy and offered a brighter picture than they had in March.

“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 Federal Open Market Committee said.

The Fed continued to say that the path of the economy would “depend significantly on the course of the virus” and the public health crisis created “risks” to the economic outlook. However, in March, the US central bank had described the pandemic risks as “considerable” — an adjective it removed on Wednesday.

The Fed kept its ultra-easy monetary policy in place. It held the federal funds rate, its main interest rate, at its target range between 0 and 0. 25 per cent and said it would continue to buy $120bn of debt per month. 

The Fed has set a high bar for starting to reduce the pace of its asset purchases, saying “substantial further progress” would have to be made toward its goals of full employment and 2 per cent inflation on average over time. The US labour market is still 8.4m jobs short of its pre-pandemic employment levels, and while inflation is expected to rise in the coming months, Fed officials do not expect it to be sustained.

In its statement on Wednesday, it acknowledged that inflation had risen, but reiterated this “largely” reflected “transitory factors”. Bond and equity markets were little changed after the statement and ahead of a press conference by Fed chair Jay Powell.

Despite assurances from Fed officials that they will take a “patient” approach when considering changes to its monetary policy, investors have begun to speculate when the central bank may be compelled to begin withdrawing its support. 

Eurodollar futures, a measure of interest rate expectations, now indicate the Fed will raise rates by early 2023, nearly a year earlier than suggested by the central bank’s latest forecasts, published in March.

Some market participants reckon the Fed could begin talking about tapering its asset purchases as early as June, with others expecting it to hold off until the latter half of this year.

“[Fed] policy is on autopilot right now, because it really is not until you get to October, November, December that you start to get price data that you are comfortable is informative about the current trend of inflation,” said Jason Thomas, head of global research at the Carlyle Group.

2021-04-28 18:02:05

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By admin