Fed Leaves Interest Rates Near-Zero as Economic Recovery Slows
Federal Reserve officials kept interest rates near zero and pledged to continue making large purchases of government bonds as the central bank seeks to help the U.S. economy weather the ongoing success of the pandemic.
“The pace of recovery in economic activity and employment has slowed in recent months, with weakness focusing on the sectors hardest hit by the pandemic,” the central bank’s Federal Open Market Committee said in its January policy statement.
Fed chairman Jerome H. Powell said at a news conference Wednesday that the virus resurgence “is weighing on economic activity and job creation” and that the economic outlook is critically dependent on the pandemic itself.
“The path of the economy continues to depend significantly on the course of the virus,” said Powell, adding that “the path ahead remains highly uncertain.”
The Fed chairman noted that household spending on services “remains low” but said that spending on goods – which drove the recovery this summer – has “moderated.”
The dire assessment shows that the Fed is still lagging the pandemic-hit economy well behind its two main goals: maximum employment and price stability. Officials hope that the cheapness of credit will help stimulate demand in the economy and create the conditions for a labor market recovery while propping up chronically weak price gains.
Aside from the fact that interest rates have been at their lowest point since March 2020, the Fed buys around $ 120 billion worth of government bonds every month. While most investors assume that buying will slow down at some point, Powell knew the economy is far from the central bank’s goals, that officials are not ready to change course, and that they will broadcast it , if anything changes .
Business & Economy
Jan. 27, 2021, 1:51 p.m. ET
“It’s just too early to talk about dates,” he said. “When we see each other at this point, we will communicate about it clearly.”
Fed officials have repeatedly stressed that they are only part of the economic response to this crisis and that Congress – which has the power to spend and provide targeted assistance – has a central role in helping the economy. As the recovery slowed last year and lawmakers struggled to agree on another bailout package, Powell and other Fed officials publicly said additional incentives were needed to help families and workers stay afloat and longer term prevent economic scars.
In his first press conference since legislature passed a $ 900 billion stimulus package in December, Mr Powell was disappointed when asked if the economy needed another round of financial assistance and said it was a matter for Congress and the Biden government to make that decision.
However, the Fed chairman suggested that more might be needed, saying a “main reason” for the strength of the economic recovery so far has been a “strong and sustained” fiscal response from lawmakers.
“We are far from a full recovery,” he said, noting that nine million people remain unemployed and “many small businesses remain under pressure”.
President Biden has proposed a $ 1.9 trillion stimulus package, but his administration needs to prepare the details and steer the legislation through Congress. This could be a challenge as some Republican lawmakers revive concerns about the nation’s rapidly growing debt, and even some Democrats raise concerns about another big package.
Together with the aid packages from Congress, the central bank’s low interest rates have helped the economy avoid an even deeper slump during the pandemic’s previous downturn, including by boosting a robust real estate market. The Fed also launched a full line of financial bailout programs last year, some of which are still in place. These helped keep credit flowing during the worst of the pandemic-induced market turmoil.
Some analysts have warned that Fed policies are jeopardizing financial stability, driving stock prices higher, and causing investors to look for increasingly sketchy assets as they attempt to find investments that offer higher payouts.
“While there is currently no alternative to continued monetary support, there are legitimate concerns about excessive risk taking and market exuberance,” International Monetary Fund officials warned on Wednesday in a blog post. “With investors betting on continued political setback, a sense of complacency seems to be permeating the markets.”