By David DiMolfetta
The Federal Reserve unanimously voted to continue holding the federal funds rate between 0 and 0.25% at least through 2023, concluding their second meeting of the year, according to a prepared statement from the central bank on Mar. 17.
The federal funds rate is the interest rate that allows depository institutions to lend to other depository institutions. In times of economic crisis, it is often fastened at a low number in order to spur economic growth.
The Fed’s decision comes as a smattering of economic indicators – ranging from retail sales, home sales, unemployment rates, and household savings – show signs that the economy is improving. Broad outlook from prior to the meeting indicated that most members of the Fed would not be confident in raising interest rates at this time.
“The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak,” the statement said.
Federal Reserve Chairman Jerome Powell has repeatedly said the central bank will continue to hold overnight interest rates near zero until the economy reaches full employment and sustained 2% inflation. Such conditions are not expected to be met this year.
The Federal Open Market Committee (FOMC) will continue to increase its holdings of U.S. Treasury securities by at least $80 billion and mortgage-backed securities by at least $40 billion, the release said. The Fed’s quantitative easing efforts have been in full throttle since last March.
The 10-Year Treasury yield curve, a major economic indicator that shows the relationship between the interest rate and borrowing period of a bond, briefly rose to a 13-month high of 1.67% the morning of Mar. 17 prior to the Fed’s statement release. The yield held in place after the Fed’s meeting concluded on the same day.
The yield curve measures bond investors’ views of economic risk. In normal economic conditions, short-term bonds carry lower yields to reflect the fact that an investor’s money is at less risk, while longer-term bonds carry higher yields due to a greater likeliness of a borrower defaulting, adhering to the “more risk, more reward” investor sentiment. The yield curve inverted in August 2019, indicating that it forecasted a 2020 recession. It has been upward sloping since global lockdown guidelines took effect last March amid Covid-19, a sign that the economy is recovering during the recession.
While the yield has been reacting positively overall, it has also been influenced by rising inflation fears. The 10-year yield has increased modestly since the start of this year in response to potential inflation triggers from U.S. President Joe Biden’s recently enacted $1.9 trillion stimulus bill and the distribution of Covid-19 vaccines.
In a post-meeting press conference on Mar. 17, Powell said that the FOMC projects the inflation rate to be 2.4% for 2021, but a decrease to 2% is expected sometime next year. He added the Fed plans to enact policy that averages inflation towards the Fed’s 2% goal over the next year, though he ensured reporters to not scrutinize too much about inflation targets.
In previous meetings and conferences, he did not considerably opine on inflation. In his Feb. 24 testimony to the House Financial Services Committee, he said that “inflation dynamics do change over time” but that they “don’t change on a dime.”
Powell continued to stress the impact Covid-19 has had on minority workers in the U.S. – particularly African Americans and Hispanics – saying that the pandemic has “not fallen equally” on all Americans.
“We’d like to see those people continue to get supported as the economy recovers,” he said.
Powell said that the Fed’s goal of bringing the economy back into full swing are outcome-based, largely depending on how vaccine rollout and social distancing measures continue, though any health policy related to handling Covid-19 is ultimately “up to the experts.”
“The path of the virus continues to be very important,” he said. “We’re not actually done yet and I’d hate to see us take our eye off the ball before we actually finish the job.”
