FOMC still believes inflation will moderate, but is discussing when and how to taper
The Federal Open Market Committee (FOMC) at the conclusion of its two-day monetary policy setting meeting again committed to “using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.” The Fed said its monetary policy stance will remain accommodative until it achieves its goals of “maximum employment and inflation at the rate of 2% over the longer run.” Therefore, it will keep its target range for the federal funds rate at 0.00% to 0.25%. It will also continue to increase its holdings of Treasury securities by at least $80 billion per month and its agency mortgage-backed securities by at least $40 billion per month.
Increasing vaccinations and strong policy support helped economic activity and employment to strengthen, according to today’s FOMC statement, though the sectors hardest-hit by the Covid-19 pandemic have yet to fully recover. “Inflation has risen, largely reflecting transitory factors,” the FOMC said. The path of the economy will hinge on the virus and vaccination progress, according to the committee.
Federal Reserve Chair Jerome Powell offered some additional insight regarding the plans to taper asset purchases and raise interest rates in the post-meeting press conference. He said the Fed is still a ways away from considering raising interest rates, though he did acknowledge near-term risks to inflation are to the upside. He still expects inflation to moderate over the medium term. But he also said that if inflation does persist and hold above the Fed’s long-term goal, the FOMC would act.
Powell also commented that inflation has been driven by a supply side that’s not able to handle the booming demand here and around the globe. Powell said his best estimate is “this is something that will pass.” But he added the Fed is “responsible” for this and therefore will remain on the alert for persistent inflation and will act if needed.
Regarding the timing of easing, Powell said that ideally, the Fed would not raise interest rates before tapering purchases. But he also said the Fed has not made any decisions about when that might occur. In fact, he indicated that today’s meeting was the Fed’s first deep dive on the timing, pace and composition of tapering, and no decisions were made.
Yields on 10-year Treasuries fell to a session low during Powell’s press conference.
