The Federal Reserve is maintaining its low interest rate posture, but acknowledged the economy has hit a soft patch.
THE FEDERAL RESERVE left short-term interest rates unchanged at a near-zero level at the conclusion of its two-day monetary policy meeting on Wednesday but noted the economy softened at the end of 2020.
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“The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic,” the committee’s post-meeting statement said.
The statement was in line with market expectations and included the news that the central bank will maintain its aggressive asset-purchasing program. The economy is expected to have grown strongly in the fourth quarter but slowed noticeably in some areas heading into 2021. The Commerce Department releases its fourth quarter gross domestic product number on Thursday, with forecasts generally a little above 4%.
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Fed Chairman Jerome Powell said in remarks after the rate announcement that the U.S. financial system is “a long way from our employment and inflation goals.”
“We are committed to using our full range of tools to support the economy,” he said.
The Fed’s watchful waiting approach was expected, given soft labor market conditions and a sluggish rollout of the coronavirus vaccines. But most economists forecast the economy will show faster growth in the second half of the year, with some now worried about prices rising to a point where inflationary pressures may start building.
Wall Street is looking for some sort of signal the Fed is ready to slow, or “taper,” its monthly purchases of Treasury and mortgage-backed securities, which are now running at a combined $120 billion a month. This has helped keep interest rates low and also provided support for a roaring stock market with stocks offering greater returns than bonds and other fixed-income investments. But in recent days, the market has sold off on concern over speculative trading in some stocks, such as GameStop.
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The statement itself really did not contain much new information, but it did put a lid on fears that the Fed may be considering tapering asset purchases sooner than expected,” said Jason Pride, chief investment officer of private wealth at Glenmede. “If anything, the Fed added a statement recognizing that the pace of recovery has moderated in recent months.”
The Fed will likely remain cautious in its pronouncements, especially given this is the early days of a new administration in the White House. Other aspects of the economy are also showing signs of getting overheated: Existing home prices were up 9.5% in November from the prior year, while gas prices have also returned to their pre-pandemic levels. For now, inflation remains subdued, but many economists are forecasting an uptick in the second half of the year.
“Although Q1 will likely be a period of weakness, the rest of 2021 should be a year of strong GDP and employment growth due to easy monetary and fiscal policy, mass vaccination allowing for entire sectors to reopen, and the resulting rise in consumer confidence and discretionary spending,” Natixis CIB US economist Troy Ludtka wrote Tuesday as the Fed began it’s two-day meeting.
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Much will depend on vaccines reaching enough people in the U.S. and around the globe to bring about herd immunity, as well as efforts on Capitol Hill to pass a third coronavirus relief plan.
President Joe Biden has unveiled a $1.9 trillion proposal that incorporates additional one-time payments to working families along with a scattering of policies favored by Democrats, such as an increase in the minimum wage to $15 an hour. But Wall Street observers and congressional watchers expect any package to be closer to half that amount.
Last year, Congress passed two coronavirus relief packages, one of $2.2 trillion that was signed into law in late March and another $900 billion relief bill in December. One-time payments of $600 that were part of the second package began reaching people earlier this month.
Tim Smart, Contributing Editor
Tim Smart is the Contributing Editor for news at U.S. News & World Report. He served as … READ MORE
Tags: Federal Reserve, economy, United States, coronavirus, pandemic, Jerome Powell, stock market