Dovish Fed Holds Rates Steady, Powell Signals Further Support
Federal Reserve projects GDP to grow by 6.5% in 2021 with the Fed maintains its dovish stance amid support in economic activity.
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- Federal Reserve projects GDP to grow by 6.5% in 2021
- The Fed to maintain its dovish stance amid a pickup in economic activity
The Federal Reserve kept rates unchanged near zero and confirmed it will maintain the ongoing monetary policy as it continues the bond-buying program. Federal Reserve Chairman Jerome Powell, in his press conference on Wednesday, pledged the central bank will continue “to provide the economy the support that it needs for as long as it takes”.
The Fed chief announced in the opening statement, published on Wednesday, he expects the bank to maintain interest rates at 0.25% until at least 2024. The Federal Reserve also vowed to use “full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals,” according to the FOMC statement.
At the end of the two-day meeting of top Federal Reserve officials, it became clear that the Fed will maintain its dovish stance, even as the economic outlook improves. Jerome Powell cautioned that a full recovery is still far away and until then, many challenges and uncertainties require the Fed to maintain its ultra-loose monetary policy.
US Economic Outlook: Expansion on the Horizon
In his speech, Jerome Powell highlighted the positive developments due to the rapid action by Congress and the lowered coronavirus daily cases but warned against complacency. He also said that the path of the economy is strongly dependent on the course of the virus. Fed chair Powell and his colleagues upgraded their economic outlook and forecasted 6.5% growth this year, up from the projected yearly growth of 4.2% in December. If met, it would be the fastest economic expansion for the last 40 years.
The Fed also predicted a lower unemployment rate, 4.5% by end of the year instead of 5%. The central bank expects a short-lived bump in consumer prices that could lift the core personal consumption expenditure inflation to 2.2% this year. In 2022, the Fed projects PCE inflation to drop back to 2%.
“Following the moderation in the pace of recovery that began toward the end of last year, indicators of economic activity and unemployment have turned up recently, although the sectors of the economy most adversely affected by the resurgence of the virus and by greater distancing remain weak”, Jerome Powell said, noting that the fiscal actions by President Biden have provided “essential support to households, businesses, and communities”.
Even amid a modest pickup in economic activity, improving market conditions, and progress on vaccinations as well as recent fiscal policy, the central bank reiterated it will continue to buy bonds at the rate of $120bn per month until it sees “substantial further progress”.
The economy, by February, remains far below the Fed’s goals. Even after 379,000 jobs were created in February, there are 9.5 million jobs less compared with a year ago. Following Mr. Powell’s commentary, the stock market climbed while the 10-year Treasury yield eased from recent highs. The 30-stock Dow Jones Industrial Average index closed above 33,000 for the first time, up 0.58% on the day to close at 33,015. The broad-based S&P500 notched a gain of 0.29% and ended the session at 3,974 points. The tech-heavy Nasdaq Composite rose 0.40% and finished at 13,525. Equity futures on Thursday point to the upside.