The Federal Open Market Committee said it would leave its benchmark short-term interest rate near zero, and continue pumping money into the financial system by buying Treasury bonds and mortgage-backed securities at the same pace it has since spring 2020. Low interest rates spur economic activity by making it cheap for businesses and consumers to borrow money, and bond buying helps keep longer-term rates low and flushes the financial system with cash. The committee noted that although economic conditions have improved and the labor market has started to recover, many sectors that were hit hardest by the pandemic still have some ground to make up. Last year, the Fed slashed interest rates and started its program of asset purchases to keep money available to individuals and businesses as the economy shut down to slow the spread of coronavirus. Now, with vaccines widely available and the economy reopening, people are out spending again. Demand for goods and services has surged but supply hasn’t kept up, and inflation has spiked. Last month, consumer prices rose 5.4% year over year, the fastest pace since August 2008. That set off alarm bells among some economists who said the Fed has fallen behind the curve and should tighten the reins on the so-called easy money it’s been pumping into the system. Tightening money supply generally comes in two steps, first slowing the Fed’s asset purchases and then raising interest rates.
Labor Market Still Needs Improvement
Fed Chairman Jerome Powell acknowledged the increase in inflation, but attributed it to shortages of materials and labor that should abate as the pandemic fades. He also said that comparisons to very low levels last year, when economic activity was severely restricted, were misleading. Powell said that price increases were not broad-based but rather concentrated in industries directly affected by the pandemic, like the auto industry, which has been hampered by a worldwide chip shortage. “We’re looking at tapering asset purchases,” Powell said in a press conference after the meeting. “We’re clearly a ways away from considering raising interest rates. It’s not something that is on our radar screen right now.” Powell said, “We have some ground to cover on the labor market side. I think we’re some way away from having had substantial further progress toward the maximum employment goal.” He noted that labor participation continues to be constrained by caregiving needs, ongoing fears of the virus, and unemployment insurance payments. He said he expects those factors to fade in the coming months and employment gains to be strong. But he also noted that the pace of vaccinations has slowed and the “Delta” strain of the virus is spreading quickly in some areas, so risks to the economic outlook remain. Have a question, comment, or story to share? You can reach Medora at medoralee@thebalance.com
