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Fed Vows to Continue Monetary Support Amid Rosier Outlook

Fed reiterates support for the US economy through its bond-buying scheme. Chairman Powell to deliver upbeat remarks today before Congress.

SageFX - Jun, 22, 21

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Principal Points

  • The Federal Reserve reiterates support for the US economy through its bond-buying scheme
  • Fed Chairman Jay Powell to deliver upbeat remarks today before Congress

Several senior Federal Reserve officials said in recent days that the US economy still requires the hefty monetary support provided by the US central bank. The Federal Reserve stated it will not yet pull back its bond-buying of $120bn per month, even though the perspective for the US economy has become more positive.

Comments from John Williams, the president of the Federal Reserve Bank of New York, were delivered on Monday during a web conference with the Midsize Bank of Coalition of America. In his remarks, Mr. Williams projected the central bank will remain committed to helping the US economy on its path to recovery even though the economy was “getting better all the time.”

“It’s clear that the economy is improving at a rapid rate, and the medium-term outlook is very good,” Mr. Williams said. “But the data and conditions have not progressed enough for the Federal Open Market Committee to shift its monetary policy stance of strong support for the economic recovery.”

Inflation Projected to Decrease Next Year

On the topic of inflation, Mr. Williams said he expected higher prices to come down close to 2% next year, down from around 3% this year. “My view is that the spike in inflation mostly reflects the temporary effects of the surprisingly rapid opening of the economy,” he said.

The comments from John Williams arrived shortly before Federal Reserve Chairman Jay Powell released its scheduled testimony before Congress. The prepared remarks, to be read later today, pointed to “sustained development” in the current economic cycle, but also mentioned the “uneven” pace of recovery in the labor market.

Fed Chair Powell will also mention that the central bank expects inflation “to drop back toward our longer-run goal,” a position he has maintained even before inflation arrived in April. “We at the Fed will do everything we can to support the economy for as long as it takes to complete the recovery,” the Fed Chair is expected to say today.

The economic outlook provided by the central bank last week included an interest rate increase in 2023, one year earlier than previously announced. Still, John Williams and Jay Powell made clear the Fed would stick to the terms of its monetary policy. Included in the framework introduced last August is a bond-buying program of $120bn a month, which is divided between $80bn a month of Treasury securities and $40bn a month of agency mortgage-backed securities.

The Federal Reserve has set a high bar for withdrawing its stimulus, namely steady prices, and maximum employment. The first goal would need more tweaking, which could be done with the interest rate increase, while the second goal is still far away as around 8 million people less are now employed compared with pre-pandemic levels.

Some investors, however, fear that the continued flow of money into the system could cause the economy to run hotter than what the Fed could handle. Moreover, higher interest rates threaten the lofty prices of stocks, particularly in technology, because of their forward-looking valuations.