WASHINGTON—The Federal Reserve announced on March 17 that it would keep U.S. interest rates near zero as the pandemic continues to pose “considerable risks” to the economy. The central bank, however, made a significant upgrade to its forecasts to reflect the acceleration of economic recovery after the $1.9 trillion COVID-19 relief package.
“Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak,” the Federal Open Market Committee’s (FOMC) revised statement reads.
At the end of a two-day meeting of the committee, Fed officials said they would hold the federal funds rate at a range of zero to 0.25 percent, in line with expectations. The central bank will keep the rates near zero through 2023, according to the new projections. However, 7 out of 18 Fed officials expect a rate increase next year or in 2023.
“The economic recovery remains uneven and far from complete and the path ahead remains uncertain,” Chairman Jerome Powell said at a post-meeting press conference, adding that the Fed’s monetary policy would continue to support the economy “until the recovery is complete.”
He noted, however, that the recent improvement in the labor market is a positive sign. U.S. employers added a robust 379,000 jobs last month and the unemployment rate fell to 6.2 percent from 6.3 percent in January.
Since the last FOMC meeting on Jan. 27, the economic outlook has improved with the progress in the vaccine rollout and the Biden administration’s $1.9 trillion stimulus package. To reflect that, Fed policymakers substantially increased their growth forecasts.
Gross domestic product (GDP) is now expected to grow by 6.5 percent (median) in 2021, compared to the 4.2 percent increase projected in December. The central bank expects the economy to expand by 3.3 percent and 2.2 percent in 2022 and 2023, respectively. Those figures reflect a 0.1 percent upward revision from December’s forecast for next year and a 0.2 percent downward revision for 2023.
The median projection for the unemployment rate for the end of this year was reduced to 4.5 percent from the 5.0 percent projected in December. The Fed projects a 3.9 percent unemployment rate next year, and 3.5 percent by 2023.
The Fed officials expect upward pressure on prices this year due to an increase in spending with the opening up of the economy.
The Fed’s inflation projection rose to 2.4 percent this year, up from 1.8 percent projected earlier. But officials expect inflation to return to 2 percent next year, indicating that inflationary pressures will be temporary.
As part of its efforts to support the markets, the Fed has been buying at least $80 billion per month in Treasuries and $40 billion in mortgage-backed securities since June last year. The central bank announced that it would continue to increase its asset holdings at the current pace.
On the tapering of asset purchases, Powell said that the Fed would continue at the current pace until it sees “substantial further progress.” He reiterated that the Fed would be looking for actual progress in the data, not forecasted progress.
“We also understand that we will want to provide as much advance notice of any potential taper as possible,” he said.
While there have been positive developments in both the economic data and the trajectory of the virus, Powell’s message about the tapering of asset purchases is in line with market expectations.
“As we have noted in the past, we think this messaging is consistent with our expectation for a tapering announcement around year-end,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said in a report.
Powell expects Congress to shift its focus to business investment in the longer term for the economy’s full recovery.
“It takes a lot of investment to support a more productive economy and raise living standards. And that hasn’t been the principal focus” of the fiscal measures, he said.
“What Congress has been doing is mainly been replacing lost income and beginning to support people as the economy returns to normal. But there should be a longer-term focus … on the investment front,” which includes investment in people, skills, plants and equipment, and software, Powell said.