• Fed Grows More Optimistic Over Economic Recovery

    Fed Grows More Optimistic Over Economic Recovery

    Central Bank Upgrades Growth Forecasts As It Keeps Rates Low

    Federal Reserve Chair Powell participates in the virtual Federal Open Market Committee press conference on March 17. (Federal Reserve)
    Federal Reserve Chair Powell participates in the virtual Federal Open Market Committee press conference on March 17. (Federal Reserve)

    The Federal Reserve plans to keep the target range for its short-term policy rate between 0% to 0.25% until labor market conditions improve to levels consistent with maximum employment and until inflation is on track to exceed 2% for some time.

    The statement Wednesday came at the end of its two-day March monetary policy meeting during which the Fed said it would also continue to buy at least $80 billion in Treasury securities and $40 billion in agency mortgage-backed securities to support the flow of credit to U.S. businesses and consumers.

    Reflecting the impact on the economy from additional fiscal stimulus and the progress on vaccinations, Fed officials upgraded their projections for growth, unemployment, inflation and interest rates over the next few years.

    Policymakers now expect the economy to grow 6.5% this year, much faster than projected in December. Prices are also forecast to increase more quickly, with inflation reaching 2.4%. Economic growth is expected to moderate next year as the effect of fiscal stimulus fades. The pickup in inflation is also projected to be transient.

    With the improving economic outlook, more Fed officials now project an earlier start to interest rate increases. Still, the majority do not see any rate hikes occurring until 2024.

    At his post-meeting press conference, Fed Chair Jerome Powell reiterated the central bank’s commitment to maintaining a highly accommodative monetary policy, especially since labor market conditions remain weak.

    He emphasized that the Fed considers a broad range of indicators to gauge the health of the labor market, including the unemployment rate, labor force participation rate, employment-to-population ratio and wages. And while the unemployment rate has declined quickly as the economy reopened, Powell noted that millions of people remain without a job and labor participation is holding near a 50-year low.

    Over the past few months, brightening prospects for the U.S. economy have boosted long-term interest rates, including mortgage rates. While Powell acknowledged that a spike in long-term interest rates could threaten economic recovery, at this point financial conditions remain favorable and do not warrant actions to bring those rates lower, he said.

    For now, the central bank appears both optimistic about the economic recovery and happy to continue keeping its policy rate ultra-low for a few more years.

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