Fed Keeps on Interest Rate Target Near Zero, Describes Inflation as Transitory

Chairman of the Federal Reserve Jerome Powell appears before a Senate Banking Committee hearing on Capitol Hill, on December 1, 2020 in Washington,DC. (Photo by Al Drago / POOL / AFP) (Photo by AL DRAGO/POOL/AFP via Getty Images)
Photo by AL DRAGO/POOL/AFP via Getty Image

The Federal Reserve on Wednesday acknowledged recent progress in employment and economic growth while saying it would keep its interest rate target near zero and continue to support the economy until the recovery is complete.

“Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” the Fed’s Open Market Committee said in a statement issued at the conclusion of its two-day meeting.

The Fed also said some weakness persists in parts of the economy and downplayed inflation risks. The services sector—particularly the hospitality business—remains far below pre-pandemic levels of employment and business activity.

“The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors,” the Fed said.

Other parts of the economy have fully recovered, particularly the housing market. The manufacturing sector has been strengthening for several months, with recent signals that growth is accelerating, although employment in U.S. factories is still below pre-pandemic levels.

The Fed said that it believes the path of the economy remains dependent on the course of the virus.

The Fed has held the overnight interest rate it targets, as well as the rate it pays to banks on reserves, near zero since March 2020. Fed chair Jerome Powell and other Fed officials have said they will not raise rates until the labor market has fully recovered and inflation has reached the central bank’s goal of averaging 2 percent. On Wednesday, Powell said at a press conference that a temporary move above the two percent goal this year would not trigger a rate increase.

Since June, the Fed has been purchasing at least $80 billion of Treasury bonds and at least $40 billion of mortgage-backed securities, aiming to further loosen financial conditions and support the flow of credit to households and businesses. The Fed said again on Wednesday that it would keep up these bond purchases “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”

In the press conference, Powell said it was not yet time to even “start talking about talking about” tapering the purchases, promising Fed officials would begin discussing the prospect of smaller purchases long before actually changing the level.

 “That time is not now,” Powell said.

 

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