How much longer can the Fed be boring and predictable? | Business and economic news

As expected, the Fed left its benchmark interest rate unchanged at near zero at the end of its two-day policy meeting, but the US central bank cannot maintain easy monetary policy indefinitely.

Anyone who said it doesn’t pay to be boring and predictable, has never walked a mile in Federal Reserve Chief Jerome Powell’s shoes.

As expected, the Fed closed its last two-day policy meeting on Wednesday by keeping its benchmark interest rate close to zero and without making any changes to its bond-buying program designed to keep interest rates at. long term low.

In another unsurprising move, policymakers recognized that the economy was on the mend without being too effusive.

“The sectors most affected by the pandemic remain weak but have shown improvement,” the Fed said in its post-meeting statement.

The restraint is indicative of the difficult balance that Fed officials must strike in the months to come.

The Fed cut interest rates to near zero and launched a host of other extraordinary measures last year to maintain credit to businesses and households and help the economy survive and heal from the devastating blow. by the coronavirus pandemic.

But cheap money cannot be a feature of the country’s monetary policy indefinitely. Too much easy money for too long Risk of causing inflation, so the dollar in consumers’ wallets doesn’t go that far. And once inflation starts to get out of hand, it’s very difficult to get it under control.

Powell has made it clear – very clearly over and over again – that he is not worried about the price hike, which he says will be temporary. In fact, the Fed is prepared to tolerate an inflation trend above its target level of 2% for a period of time, if that’s what it takes to help the country’s labor market regain its strength. pre-pandemic mojo. And the job market is still 8.4 million jobs shy of recouping the 22 million jobs it lost in the first round of lockdowns last year.

But it’s not just monetary policy that can fuel inflation. Budget support – as in the case of Congress stepping up generous virus aid for businesses and households – can also translate into higher prices.

That’s because consumer spending is the engine of the US economy, driving about two-thirds of growth.

The more stimulus money people receive from the federal government, the more likely they are to trigger pent-up demand for goods and services. As businesses scale up to cater to these reinvigorated consumers, it can lead to bottlenecks in supply chains and temporary shortages of materials and even labor, pushing up prices.

Progress on immunization – something the Fed acknowledged in its post-meeting statement – also plays a role, as restrictions that undermine business are lifted and more Americans feel comfortable to resume activities that they skipped before receiving their blows.

There is plenty of evidence that the economy is on the right track. In full swing even by some measures.

Retail sales rebounded in March, especially when it comes to consumer spending in restaurants and bars – an industry that has been hit hardest by the pandemic.

The recovery of the labor market is gain strength, the economy adding 916,000 jobs in March and unemployment edged down to 6 percent. Consumer confidence – a key indicator that measures how people think about the economy (moody consumers tend to sit on their wallets, while happy people tend to spend) – hit a 14-month high this month.

As for inflation, consumer prices rose 0.6% in March – biggest month-long jump in over eight years. Almost half of this increase was due to a sharp rise in gasoline prices, which tend to be volatile.

On Thursday we will have the first reading of the growth of the US economy in the first three months of this year.

The conundrum the Fed faces is how to reduce all the support it has given to the economy without triggering a repeat of the “taper tantrum” of 2013. At the time, the Fed found itself in the position of wanting to curb easy money and raise interest rates. But as soon as he signaled that he was even considering doing so, financial markets panicked and drove yields on US Treasuries higher. Soaring Treasury yields threatened to derail the long and drawn-out recovery of the US economy after the Great Recession.

Clearly, the Fed wants to keep the current recovery on track. And the economy is recovering at a much faster rate now than it did after the Great Recession.

But at some point – many analysts suspect it will be this summer – Powell and his colleagues will have to start preparing financial markets for the inevitable. Because easy money can’t last forever.

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