• Wed. Mar 3rd, 2021

Fed Keeps Its Rates Unchanged; Predicts That US Will Grow 4.2%

ByMichael Grey

Jan 11, 2021
rates unchanged

The Federal Open Markets Committee ( FOMC ) of the Federal Reserve concluded its last monetary policy meeting of 2020 on Wednesday. A year in which the United States central bank has been forced to swallow more than 3 trillions of dollars in assets and to return the price of money to a range of 0% and 0.25% to face the economic impact of the coronavirus pandemic .

In the statement issued at the close of their two-day entourage, the ten members with the right to vote opted as planned to keep the federal funds rate at current levels, where it will remain unchanged until labor market conditions have reached levels consistent with peak employment and inflation is on track to moderately exceed 2% for some time.

However, the FOMC made certain changes when it came to addressing its program to buy Treasury bonds and mortgage-backed assets, commonly referred to as quantitative easing ( QE ). Currently, the Federal Reserve buys each month 80,000 million dollars in Treasury bonds and another 40,000 million dollars in mortgage assets and its balance reaches 7.24 trillion dollars.

The Committee promised to keep the pace of purchases unchanged, but in its message it announced that these will continue “until substantially more progress has been made towards the goals of maximum employment and price stability.” On previous occasions, the FOMC had limited itself to ensuring that its quantitative easing would continue “for the next several months.”

Currently, the Federal Reserve buys a month 80,000 million dollars in Treasury bonds and another 40,000 million dollars in mortgage assets and its balance reaches 7.24 trillion dollars.

The last meeting of the year was accompanied by an update to the central bank’s macro chart , which also included the dot plot in which the 17 FOMC officials offer their perspectives on where short interest rates will be, medium and long term.

The average continues to indicate that the central bank will not make a move when it comes to the price of money at least until the end of 2023. However, five of the 17 members of the FOMC already see at least one to three rate hikes interest by then.

Regarding the macroeconomic situation, the Fed improves its prospects for the United States economy, with the average number of officials projecting a contraction of -2.4% this year compared to the -3.7% expected in September. It also improves its prospects for 2021 and 2022 by two tenths, when GDP will grow by 4.2% and 3.2% respectively.

The Federal Reserve also believes that unemployment will be lower than expected three months ago with the unemployment rate standing at 6.7% this year and falling to 5% next year. For 2022 and 2023, the downward path will put unemployment at 4.2% and 3.7% respectively.

Regarding inflation, the average of the participants believe that this will reach 1.2% this year and will rise to 1.8% in 2021 to stand at 1.9% a year later. In 2023 it will achieve the 2% goal. The underlying reading follows a similar path, except for the timid reduction made for the current year.

The Treasury cuts the wings of the Fed’s emergency programs
The Federal Reserve will be forced to let a good part of the emergency programs launched by the central bank expire since the scourge of the pandemic on December 31 after the express request of the Treasury Department .

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