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Livesquawk - Fed Sees Economy Improving; Holds Steady On Rates, QE
Fed Sees Economy Improving; Holds Steady On Rates, QE
Fed Chairman Jerome Powell.

- Central bank suggests lower risk from coronavirus

- No talk yet about tapering

- Recovery “far from complete”



By Eric Culp, European Editor

LiveSquawk News




28 April 2021 | 20:00 GMT


The US Federal Reserve did what virtually everyone expected on Wednesday: Nothing. Policymakers decided to retain the benchmark interest rate at 0% - 0.25% and monthly asset purchases at USD 120bln, but they also offered a slightly rosier forecast for the world’s biggest economy.


In its statement, the Fed said: “The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain,” dropping “considerable” from the end of the sentence to signal a incremental improvement in expectations. Indicators for growth and employment have “strengthened” instead of merely having “turned up recently”. The Fed also cited “progress on vaccinations and strong policy support”. Sectors hit by the pandemic remain weak “but have shown improvement”, the Fed corrected, adding that inflation has risen, which largely reflects “transitory factors”.


James Knightly from ING said the changes to the wording of the statement are significant. “To us, they suggest a growing optimism within the FOMC, potentially laying early groundwork for a tapering of their QE program before year-end, despite Powell saying it isn't yet time to have that conversation.”


The US 10-year treasury yields fell and flirted with 1.62% during the post-announcement press conference with Fed Chairman Jerome Powell, and the euro climbed sharply against the greenback.


The good, the bad, the waiting

Despite the increased optimism in the statement, the economic picture remains mixed, Powell noted, as if he were constantly saying “Yes, but …” to point to out risks. He warned that headline inflation this year will push above the Fed’s 2% target, but that increase will be transitory and not enough to meet the standard for raising interest rates.


The Fed supremo said base effects will contribute 1 percentage point to headline inflation, with those factors also impacting PCE core inflation, the central bank’s preferred measure of consumer price growth. Support for prices is also expected from rising oil prices and additional consumer spending as America continues to reopen.


While citing the strongest housing market since the global financial crisis and “real momentum” in the economy, he said the rebound, while better than expected, has been uneven and is far from complete. “What matters the most to the economic recovery is controlling the virus.”


The labour market remains one obstacle to a more hawkish stance. “We don’t see wages moving up yet,” Powell said, noting that such a shift often happens when jobs become scarce. With near complete employment one the Fed’s goals, Powell repeatedly stated that the number of payroll jobs is 8.4 mln below the level in February 2020. Non-farm payrolls jumped more than 900,000 last month, but it will take a number of months like that before rate-setters are confident in the trend, analysts say.


Because of these caveats to the growth situation, Powell reiterated the point that before tapering, the Fed wants to see “substantial further progress to our goals”. He did note that those targets do not necessarily need to be fully attained before the central bank lifts it foot from the accelerator. Analysts have been predicting that the bank will begin discussing winding down the asset purchases in late summer or early autumn, with economist expecting action next year at the earliest.


“Now we wait,” said Jennifer Lee, senior economist at BMO. “The committee gave a nod to all the signs that the economy is starting to return to where it was before all of this (wave both arms around—unless one is sore from the vaccine shot) happened. However, the FOMC is still quite cautious. Everything is riding on the path of the virus, and vaccinations. And of course, the committee will adjust policy if risks emerge.”