MercoPress. South Atlantic News Agency

Fed leaves rates unchanged but admits inflation could force a change of policy

Fed chairman Powell admits the path of the US economy continues to depend on the course of the virus

The United States Federal Reserve kept interest rates unchanged, close to zero, despite an inflation spike during June when it soared to an annual 5,4%, its highest in thirteen years.

On Wednesday the Federal Open Market Committee, FOMC, unanimously left rates in the range of 0% to 0,25%, as they have been since March 2020, when it implemented two cuts because of the pandemic's effects for the US economy.

FOMC explained in a release following a two-day meeting that with progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy continues to depend on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.

Regarding the purchase of assets for up to 120 billion dollars monthly, Fed said it will continue with the policy until substantial progress has been achieved in the implementation of price stability and maximum employment, for which it has committed all its box of tools.

Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least US$ 80 billion per month and of agency mortgage backed securities by at least US$ 40 billion per month until substantial further progress has been made toward maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. FOMC would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Fed chairman Jerome Powell admitted that problems related to the pandemic seem to be to a certain point a burden for the growth of jobs, but he was confident this should diminish in the coming months, and that from the labor market there is still some distance to cover before considering an adjustment of the support programs.

“Fed has never taken a decision on when to begin the retreat”, said Powell, who nevertheless avoided any mention to a calendar to begin lifting interest rates. However he admitted that inflation is proving to be stronger and more persistent than originally anticipated”, but he insisted that higher prices will moderate since inflation expectations remain well anchored and seem to be aligned with the Fed's targets.

Anyhow Powell pointed out that the Fed is ready to adjust its policy if inflation climbs persistently higher than the targets, although he underlined that this is not the ideal moment to think in increasing interest rates, and instead the Fed will be looking at the purchase of assets.