Fed Chairman Jerome Powell expects a transitory rise in inflation that will not prompt Fed action as it remains accommodative to boost the labor market.
The Federal Reserve has maintained its target interest rate in the 0% to 0.25% range at its March meeting, pointing to the continuing hardship the coronavirus pandemic is causing worldwide.
This means credit card interest rates, which are tied to the Fed’s target interest rate, are likely to continue at current levels for a while.
In a media release, the Federal Open Market Committee, the Fed’s rate-setting body, noted that although employment and economic activity-related indicators have gained recently, inflation still remains below the Fed’s targeted 2%. Also, the sectors impacted by the pandemic remain weak.
Economic recovery is tied to containment of the pandemic, including progress with vaccinations. The Fed expects to maintain its accommodative stance until inflation runs a bit above 2% for a while (so as to make for a 2% inflation average, considering that inflation has been undershooting 2% for a prolonged period), and maximum employment is attained.
The Fed will also continue with its monthly purchases of $80 billion in Treasury securities and $40 billion in mortgage-backed securities until “substantial progress” has been made toward its inflation and employment goals.
See related: Average credit card interest rates
Fed members more optimistic about economy
Going by the “dot plot” of Federal Reserve members’ input about economic data, which was released together with the Fed statement on its interest rate action, it seems they are more optimistic about the economic outlook.
At the median, they expect economic output to grow 6.5% for 2021, compared to their 4.2% projection last December. For the unemployment rate, the expectation is 4.5% for 2021 (dropping off to 3.5% by 2023), down from 5% in December. They also see inflation ending 2021 at 2.4%, compared to a December expectation for 1.8%. They anticipate that the target Fed funds rate will be in the 0.1% to 1.1% range by 2023.
In a related online press conference following the Fed meeting, Fed Chair Jerome Powell indicated that the Fed will only think about moving its target rate up when it sees that the economy is on track to achieve “substantial progress” based on actual data. The “dot plot” summary of Fed member expectations is not an actual forecast and it is “not meant to be a prediction of when the committee will act,” he noted.
Powell expects inflation to go up over the next few months as economic recovery will mean that prices go up with people spending more on activities such as entertainment and eating out that have been curtailed for a while. However, he expects this inflation effect to be “transitory.”
This will not prompt any action from the Fed. It would like to see inflation run moderately above 2% for a while and it will not act pre-emptively as it continues to support employment growth. In the last expansion inflation did not rise much even as the unemployment rate touched lows.
Invest in productivity
The economy is still down 9.5 million jobs from its pre-pandemic level and participation in the labor market is also below those prior levels. As to the question of whether there needs to be more action on the government spending and lending front, Powell noted that fiscal policy (which includes three rounds of economic stimulus ) has helped the economy heal, considering the size of the stimulus and the “speed with which Congress has delivered.”
Longer-term, Powell believes that what really needs to be done is for the government to invest in productive capacity. While Congress’s stimulus has helped people replace their incomes, “longer term there should be a focus on the investment front,” Powell said.