Fed Sees Stronger Economy But Keeps Stance Status Quo

Couple meeting with financial advisor.
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A Federal Reserve committee unanimously voted Wednesday to keep things status quo, as expected, making no change to benchmark interest rates or the Fed’s bond-buying program, even as it acknowledged inflation has risen and the job market and economy have strengthened.

“While the recovery has progressed more quickly than generally expected, it remains uneven and far from complete,” Fed Chairman Jerome Powell said in prepared remarks for a press conference following a two-day meeting of the Fed’s Federal Open Market Committee (FOMC). “The path of the economy continues to depend significantly on the course of the virus and the measures undertaken to control its spread."

Since lowering its target for the benchmark fed funds rate to virtually zero (between 0 and 0.25%) at the onset of the COVID-19 pandemic just over a year ago, the FOMC has maintained this easy money policy, and a hefty government bond-buying program, to keep the economy flush with cash. An increase in the rate would mean higher borrowing costs for people buying homes, cars, and everyday items. 

Although the economy and employment picture have improved, the FOMC said it still needs to see “substantial further progress” before taking its foot off the stimulus pedal. The increase in inflation, which can be controlled by raising interest rates, isn’t worrisome, the committee suggested, because it largely reflects “transitory factors.” These will continue to impact the economy short-term and include supply chain bottlenecks, pent-up demand from consumers cooped up during the pandemic, and the so-called base effects—meaning comparisons to unusually low levels of inflation last spring.

Powell also addressed reports that businesses are experiencing difficulty finding workers despite the fact that there are still 8.4 million fewer jobs now than before the pandemic.

“Clearly there’s something going on out there as many companies are reporting labor shortages,” he said.

He said people are returning to a different economy, one in which many service-sector companies may be deploying better technology, for example, and workers may not have the specific skills they’re seeking. 

Another “big factor” would be school closures, he said. People are still “at home taking care of their children and would like to be back in the workforce but can’t be yet.” 

The economy is likely to reach an “equilibrium between labor supply and labor demand,” though it may take “some months,” he said.