Despite Illusion of Improving Conditions, Fed is Staying the Course… What Does that Mean for Rates?

To cut to the point, they’re not going up anytime soon, according to Fed Chair Jerome Powell

Simply put, the Fed doesn’t believe any pricing pressures in the economy will warrant a change in its interest rate policy for the next three years, as Powell assures us that near-zero rates likely won’t rise through 2023.

The news comes despite anticipated economic growth stemming from more stimulus relief, further inflation, and a recovery in the labor market, which all seems to be part of a one-time recovery story in the U.S. economy. In the end, it appears central bankers made their decision based on their view of the economic road ahead and what impact that could have on policy, according to a post-meeting statement on Wednesday

“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. Inflation continues to run below 2 percent,” the committee said in its post-meeting statement.

‌To help further explain the Fed’s rationale, Fed Chair Jay Powell tried his best to put the situation into lamens terms: 

‌”There very likely will be a step-up in inflation as March and April of last year drop out of the 12-month window, because they were very low inflation numbers. Those will be a fairly significant pop in inflation, but those will wear off quickly because [of the way] the numbers are calculated.”

‌”Past that, as the economy re-opens, people will start spending more. You can only go out to dinner once per night, but a lot of people can go out to dinner. And they’re not doing that now, they’re not going to restaurants, they’re not going to theaters…and travel, and hotels, that part of the economy is really not functioning at full capacity.”

In the end, Powell puts America’s situation into perspective, with an honest assessment of the road ahead, recovering from the pandemic:

“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.”

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