The Federal Reserve announced on Wednesday that it will keep its benchmark interest rate near zero, despite rising inflation and strong economic growth. The central bank also said it will continue its monthly bond purchases of $120 billion, which are intended to support the economy and financial markets.
The Fed’s statement acknowledged that the economy has made progress toward its goals of maximum employment and price stability, but said that more improvement is needed before it starts to reduce its bond purchases. This process, known as tapering, is expected to begin later this year or early next year, according to Fed officials and analysts.
The Fed’s bond-buying program, which began in March 2020 in response to the coronavirus pandemic, has helped lower long-term interest rates and boost asset prices. However, some critics argue that it has also contributed to higher inflation, which surged to 5.4% in June, the highest level in 13 years.
The Fed has maintained that inflation is largely transitory, driven by supply bottlenecks and base effects, and that it will moderate as the economy recovers from the pandemic. The central bank has a 2% inflation target, which it views as consistent with healthy economic growth.
Fed faces challenges from delta variant and fiscal policy
The Fed’s decision comes amid growing uncertainty about the outlook for the economy, as the delta variant of the coronavirus poses a threat to the recovery. The variant, which is more contagious and deadly than previous strains, has led to a surge in cases and hospitalizations in the US and around the world, especially among the unvaccinated population.
The Fed said that the path of the economy depends significantly on the course of the virus, and that risks to the economic outlook remain. The central bank also urged more Americans to get vaccinated, saying that it would help the economy return to normal faster.
Another challenge for the Fed is the uncertainty surrounding fiscal policy, as Congress debates over a bipartisan infrastructure bill and a larger spending package proposed by President Joe Biden. The Fed has said that fiscal support has been essential for the recovery, but that it also adds to the inflationary pressures.
Fed remains patient and flexible
The Fed’s statement reiterated that it will keep its interest rate near zero until the economy reaches full employment and inflation is moderately above 2% for some time. The Fed also said that it will monitor the incoming data and adjust its policy as appropriate to achieve its objectives.
The Fed’s interest rate, which influences borrowing costs for consumers and businesses, has been at the historically low level of 0% to 0.25% since March 2020. The Fed has not raised its rate since December 2018, when it was at 2.5%.
The Fed’s next meeting is scheduled for September 21-22, when it will release its updated economic projections and interest rate forecasts. The Fed chair, Jerome Powell, will also hold a press conference after the meeting, where he may provide more details on the timing and pace of tapering.