Federal Reserve officials kept interest rates near zero on Wednesday, pledging to continue making large bond purchases as the central bank tries to help the economy weather the ongoing pandemic, warning that a surge in the coronavirus marks progress toward a full one Recovery slowed down.
“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 chair 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 dependent on the pandemic and “remains highly uncertain”.
Given this dire short-term view, Powell suggested that the greater risk to the economy in the months ahead was doing too little and not too much. He downplayed concerns that either an aggressive spending reaction from Congress or very low interest rates would lead to runaway price inflation, and warned that the possibility of displaced people stuck on the edge of the labor market could wreak permanent damage.
“I’m much more concerned that I haven’t fully recovered and lost people’s careers and the lives they built because they didn’t get back to work on time,” Powell said. Such damage would be “not only to their lives, but also to the United States economy – the productive capacity of the economy”.
“I’m more concerned about that than about the possibility of higher inflation,” he continued. “To be honest, we would like a slightly higher inflation rate.”
Mr Powell’s comments reiterated the Fed’s message that it will try to keep credit cheap for months or even years as long as it fails to meet its two main goals, promoting maximum employment and price stability. Officials hope that low interest rates will help stimulate demand in the economy and create the conditions for a labor market recovery while propping up chronically weak inflation.
Aside from the fact that interest rates have been at rock bottom since March, the Fed buys around $ 120 billion worth of government bonds every month to calm the markets and strengthen the economy. Most investors expect purchases to slow down at some point, but Mr Powell knew that officials are still far from ready to set a date when they will be tapered.
“It’s just too early to talk about dates,” he said on Wednesday. “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 deliver targeted aid – plays a central role.
As the recovery slowed last year and legislators 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.
Economy & Economy
Jan. 27, 2021, 8:28 p.m. ET
In the press conference following the meeting, its first since a $ 900 billion stimulus package was passed by lawmakers in December, Powell turned down whether the economy needed another round of financial assistance, saying the decision was up A matter for Congress and the Biden government. However, a “main reason” for the strength of the economic recovery so far is a “strong and sustained” legislative reaction to public finances.
“The way ahead is pretty uncertain,” he said, noting that small businesses are under pressure, among other things.
“He didn’t say in any way, ‘Oh, you’ve done enough,” said Julia Coronado, president and founder of MacroPolicy Perspectives, a business consultancy. “I think there’s a whole mantra of the lesson you’ve learned that you’re on the side is too busy. “
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 challenging as some Republican lawmakers rekindle concerns about the nation’s rapidly growing debt, and even some Democrats raise concerns about yet another big package.
Democrats in Congress and in the Biden administration signaled this week that they are preparing to adopt this new round of economic aid in the coming weeks, but likely not before the impeachment trial of former President Donald J. Trump early next month begins.
Mr Biden’s aides held meetings and listening sessions on his proposals with stakeholders, governors, mayors and Republicans and Democrats on Capitol Hill, White House press secretary Jen Psaki told reporters Wednesday.
Mr Biden will hold a briefing on relief efforts on Friday with the new Treasury Secretary Janet L. Yellen and other members of his economic team, Ms. Psaki said.
Mr Powell said he expected a good working relationship with Ms. Yellen, who preceded him as Fed chairman and will now be his key partner in combating the economic fallout from the virus. He said he hadn’t met her since she was confirmed, nor had he seen Mr. Biden.
While they haven’t spoken to each other, Mr Powell reiterated Mr Biden’s view that mass vaccination was key to getting the virus – and the economy – under control. Mr Powell himself has received his first shot, he said, and is expecting his second soon.
Any change in Fed policy can be put on hold, but its efforts have played an ongoing role in the economic recovery. Low interest rates have helped the economy avoid a deeper slump, including by boosting a resilient 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-related market turmoil.
However, some analysts have warned that the Fed’s policies are jeopardizing financial stability as it drives stock prices higher and prompts investors to seek increasingly sketchy assets for better payouts.
“While there is currently no alternative to continued monetary policy 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 looking to continue political setback, a sense of complacency seems to be permeating the markets.”
Mr Powell, when asked if the Fed’s easy money policy could fuel asset bubbles, said its actions were necessary to get the economy out of an “unprecedented” shock. He argued that the Fed’s rate policy is not a good first line of defense against frothy markets.
And he suggested he didn’t see a huge bubble at the moment.
“Overall, the financial stability vulnerabilities are moderate,” said Powell, marking the concerns with an amber light that is more concerned than “modest,” but still not particularly intense.
“The link between low interest rates and assets is probably not as close as you might think,” he added. “Many different factors drive asset prices at any given time.”
Jim Tankersley contributed to the coverage.