Fed members are more optimistic about the economy and Powell said the Fed could start cutting down its asset purchases this year.
The Federal Reserve voted to maintain its target interest rate in the 0% to 0.25% range at its June 2021 meeting, while acknowledging that the economy has grown stronger as vaccinations, coupled with policy support, have helped contain the COVID-19 pandemic.
The Federal Open Market Committee’s unanimous rate decision also includes the decision to continue the Fed’s monthly purchases of at least $80 billion in Treasury securities and $40 billion in mortgage-backed securities to support the flow of credit.
However, in a related press conference, Fed Chair Jerome Powell noted that there has been economic progress since December and that “it will be appropriate” to consider a plan to reduce the Fed’s asset purchases in the coming months. The Fed will communicate clearly and well in advance when that time is near. He added that discussing a liftoff of interest rates now “would be highly premature.”
The Fed’s current lack of action means that variable credit card interest rates, which are typically based off the Fed’s target interest rates, will likely continue at current levels.
Fed member projections more optimistic
The central bank aims to continue with its accommodative stance until the economy reaches a state of full employment and longer-term inflation of 2% is in sight. Although inflation has been rising in recent months, the Fed sees this rise as largely “transitory.”
It seems Federal Reserve members are more optimistic about the economy, expecting it to grow 7% in 2021, up from a projection of 6.5% in March on the Fed’s so-called “dot plot” of economic projections. On the unemployment front, the median projection is for 4.5% this year, while inflation is seen at a median 3.4% for 2021, up from a projected 2.4% in March. They also see inflation tapering off to 2.2% in 2023 and 2% in the “longer run.”
The median projection for the target Fed funds rate is 0.1% for 2021 and 2022, unchanged from March, only rising to 0.6% in 2023 (up from the 0.1% seen in March). It seems seven Fed members see rate increases next year, anticipating rates higher than the current 0% to 0.25% range in 2022.
Powell addressed concerns that the Fed could start moving toward rate hikes sooner than it previously expected. “Dots are not a forecaster of future rate hikes” and they are to be “taken with a grain of salt,” he said.
See related: Fed reports card balances down in April
Powell says economic situation is very uncertain
The Fed chairman expects inflation to drop back after a rebound due to the economic reopening. If the Fed saw signs that longer-term inflation expectations were moving up beyond its goals though, it would be prepared to adjust its policy.
On the employment front, he noted that the U.S. is on a path to a “very strong” labor market. While there are a large number of job openings, a large number of people are also unemployed. A significant number of people have retired and they could be drawn back into the labor market. The last recovery has shown that labor supply can move above its estimated trend and the Fed will be careful in assessing what is maximum employment.
While it’s easier for those going back to old jobs, it takes longer to find new ones. A number of people are also concerned about going back to public-facing jobs, and others are in caretaking roles. And the end of unemployment benefits, or reduction of benefits, could also be an incentive for some people to take jobs.
“This is an extraordinarily unusual time and we don’t have a template to understand it,” Powell said. While the Covid situation has improved, the emergence of variants of the virus, such as the Delta variant in the U.K., means “we are not out of the woods yet.”