Fed leaves rates near zero
The Federal Reserve said Wednesday the US economy is growing stronger, but it left interest rates unchanged near zero.
Interest rates will stay the range of zero to a quarter of a percent until the Fed’s goal of maximum employment and inflation of about 2% over the longer term.
To ensure the economy stays on track, the central bank will continue with its monthly asset purchases, consisting of at least $80 billion in Treasury securities and $40 billion mortgage-backed securities.
Even though investors are growing nervous that the reopening of the economy could lead to a sudden spike in inflation that could force the Fed to raise rates sooner, the central bank has been steady in its view that rate increases wouldn’t happen anytime soon.
The Fed said it is “prepared to adjust the stance of monetary policy as appropriate if risks emerge.”
But the Fed’s steady course might be a mistake, said Veteran investor and Allianz chief economic advisor Mohamed El-Erian on CNN Business’ “Markets Now” live show earlier Wednesday.
The central bank should slowly start tapping on the brakes by cutting back on its bond purchases and raising rates, so that it doesn’t have to slam the brakes when the economy is overheating, El-Erian said.
During the Fed’s press conference, Chairman Jerome Powell said it still wasn’t time to start talking about talking about tapering its asset purchases. “No, it’s not time yet,” he said in response to a reporter.
The Fed reiterated that it expects the price increases during the reopening of the economy will be temporary and won’t change inflation expectations much in the long run. The bottlenecks in global supply chains, which are also driving up prices, are also temporary, even though it’s hard to predict how long they will take to resolve, Powell said.
Anchoring inflation is only half of the Fed’s mandate. Achieving maximum employment is the other goal.
An increase in long-term inflation expectations would also suggest a strong labor market, Powell said during the press conference.
That said, “we’re a long way from full employment,” he added, and for many people previously employed in the services industry, the jobs landscape might look very different as employers reassess their hiring needs.
