Fed Minutes See Easy Money Until Jobs, Recovery Intact

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The U.S. economy and inflation have picked up more than expected this year, according to the latest minutes of the Federal Open Market Committee (FOMC) meeting, but the committee reiterated the case for easy monetary policy to fortify the recovery and gains in employment. It also said that any rise in inflation would likely be transitory.

Since the pandemic took hold last year, the FOMC—the policymaking arm of the Federal Reserve—has kept interest rates at near zero and bought back Treasuries and agency mortgage-backed securities (MBS) to help keep the economy flush with cash. That, along with three massive stimulus bills, helped limit the damage to the U.S. economy from the devastating effects of COVID-19. Now, with vaccine rollouts, the economy has been reopening, and there are hopes of returning to some normalcy this year.

The strength of the recovery this year and the inflation that came with it surprised the Fed staff, according to minutes of the March 16-17 meeting. But given the “elevated” uncertainty still surrounding the economy, especially with new and more contagious strains of the coronavirus emerging, the staff still viewed the pandemic as “tilting the risks to the economic outlook to the downside.”

Although some parts of the economy had picked up, the FOMC noted the sectors most adversely affected by the pandemic remained weak, and inflation remained below 2%. Chairman Jerome Powell has repeatedly said the Fed will keep monetary policy loose as long as inflation averages 2% in the long run—meaning some short-term divergence from that would be acceptable—and broad-based maximum employment remains elusive.

“Labor market conditions had improved recently,” the FOMC minutes said. “Even so, payroll employment was about 9.5 million jobs below its pre-pandemic level, and labor market conditions for those in the most disadvantaged communities were viewed as lagging behind those of other households. Moreover, participants noted that employment in the leisure and hospitality sector was still down substantially from its pre-pandemic level despite a sharp rebound in February.”

The FOMC also discussed the “notable rise in longer-term Treasury yields” this year, saying the move generally reflected the improved economic outlook, some firming in inflation expectations, and expectations for increased Treasury debt issuance. However, it warned “disorderly” Treasury markets or a persistent rise in yields could jeopardize its goals and “were seen as cause for concern.” 

But for now, the FOMC maintained that its “current guidance for the federal funds rate and asset purchases was serving the economy well.”