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Federal Reserve pledges 'powerful support' for economy

The Federal Reserve says that its low interest rate policies are providing “powerful support” for the economy as it recovers from the coronavirus pandemic.

In its twice-a-year report to Congress on monetary policy released Friday, the Fed indicated that it plans to maintain that support until further progress is made in recovering from last year's severe recession.

Progress on vaccinations helped to reopen the economy and produced strong economic growth over the first half of this year, the Fed noted. But the lingering effects of the pandemic still weigh on the economy, with employment well below pre-pandemic levels.

The central bank has kept its benchmark interest rate near zero, while continuing to buy $120 billion a month in Treasury bonds and mortgage-backed securities to put downward pressure on long-term interest rates. It said Friday that these efforts will help ensure that “monetary policy continues to deliver powerful support to the economy until the recovery is complete.”

The new report will be the subject of two days of hearings next week. Fed Chairman Jerome Powell will testify Wednesday before the House Financial Services Committee, and Thursday before the Senate Banking Committee.

Lawmakers will seek details on exactly when the central bank will start cutting back on its bond purchases, and when it will begin raising interest rates.

The report Friday repeated wording used by the central bank since last year, explaining that it does not expect to begin raising interest rates until its goals on maximum employment and inflation have been reached.

It also reiterated the Fed's expectation that monthly bond purchases will remain at the level of $120 billion “until substantial further progress has been made” toward its employment and inflation goals.

Shortages of materials and difficulties in hiring have had held back activity in a number of industries, and bottlenecks so far this year and other transitory factors have boosted inflation, according to the report.

“Consumer price inflation has increased notably this spring as a surge in demand has run up again production bottlenecks and hiring difficulties," the report read.

But the report repeated the view of Powell and other Fed officials that any spike in inflation is likely to be temporary.

“As these extraordinary circumstances pass, supply and demand should move closer to balance, and inflation is widely expected to move down,” the report stated.

However, the Fed report also stated that “upside risks to the inflation outlook in the near term have increased,” raising the possibility that the spike in inflation could last longer than first expected.

“The discussion of inflation developments emphasized the temporary, but likely more persistent than originally expected, inflation overshoot that was currently underway," said Krishna Guha, an analyst with investment bank Evercore ISI.

Minutes of the discussions at the Fed's last meeting in June showed that central bank officials began consideration of when and how they will start reducing the bond purchases but that no conclusions were reached. Most private economists don't expect the actual bond tapering to begin until late this year or perhaps not until early in 2022.

 

This article was written by MARTIN CRUTSINGER from The Associated Press and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.

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