May 17, 2021

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Fed paints rosier picture of US economic recovery

3 min read

The Federal Reserve upgraded its view of the US economic recovery, but kept interest rates close to zero and showed no signs of moving to withdraw support for the economy.

At the end of a two-day meeting, officials noted the improvement in the labour market and offered a brighter picture than they had in March.

“Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement,” the Federal Open Market Committee said.

The Fed continued to say that the path of the economy would “depend significantly on the course of the virus” and the public health crisis created “risks” to the economic outlook. However, in March, the US central bank had described the pandemic risks as “considerable” — an adjective it removed on Wednesday.

The Fed kept its ultra-easy monetary policy in place. It held the federal funds rate, its main interest rate, at its target range between 0 and 0. 25 per cent and said it would continue to buy $120bn of debt per month. 

The Fed has set a high bar for starting to reduce the pace of its asset purchases, saying “substantial further progress” would have to be made toward its goals of full employment and 2 per cent inflation on average over time. The US labour market is still 8.4m jobs short of its pre-pandemic employment levels, and while inflation is expected to rise in the coming months, Fed officials do not expect it to be sustained.

In its statement on Wednesday, the central bank acknowledged that inflation had risen, but reiterated this “largely” reflected “transitory factors”.

In a press conference following the release of the statement, Jay Powell, Fed chair, said it was too early to start talking about tapering asset purchases. “Economic activity and hiring have just recently picked up after slowing over the winter, and it will take some time before we see substantial further progress.”

US stocks rose as Powell spoke, with the S&P 500 paring earlier losses to be up 0.3 per cent. Long-dated Treasuries also gained, sending yields lower. The yield on the benchmark 10-year Treasury hovered around 1.61 per cent, having traded above 1.65 per cent before the press conference began.

Despite assurances from Fed officials that they would take a “patient” approach when considering changes to its monetary policy, investors have begun to speculate when the central bank might be compelled to begin withdrawing its support. 

Eurodollar futures, a measure of interest rate expectations, now indicate the Fed will raise rates by early 2023, nearly a year earlier than suggested by the central bank’s latest forecasts, published in March.

Some market participants believe the Fed could begin talking about tapering its asset purchases as early as June, with others expecting it to hold off until the latter half of this year.

“[Fed] policy is on autopilot right now, because it really is not until you get to October, November, December that you start to get price data that you are comfortable is informative about the current trend of inflation,” said Jason Thomas, head of global research at The Carlyle Group.



2021-04-28 14:49:07

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