Fed’s Powell Signals No Rate Hike Soon Despite Inflation Fears

The Federal Reserve announced on Wednesday that it will keep its key interest rate near zero and continue its bond-buying program until the economy shows more signs of recovery. Fed Chair Jerome Powell also downplayed the recent surge in inflation, saying it is likely to be transitory and not a threat to the central bank’s 2% target.

Fed Maintains Accommodative Stance

The Fed’s policy statement was largely unchanged from its previous meeting in July, when it acknowledged that the economy has made progress toward its goals of maximum employment and price stability. However, the Fed said it still needs to see “substantial further progress” before it starts to taper its $120 billion monthly asset purchases, which have helped lower borrowing costs and support the recovery.

The Federal Reserve kept its key interest rate near zero and maintained its bond-buying program on Wednesday, while downplaying inflation risks and being cautious about delta variant impact.
The Federal Reserve kept its key interest rate near zero and maintained its bond-buying program on Wednesday, while downplaying inflation risks and being cautious about delta variant impact.

The Fed also reiterated that it expects to keep its benchmark federal funds rate in a range of 0% to 0.25% until labor market conditions reach levels consistent with its estimates of maximum employment and inflation is on track to moderately exceed 2% for some time. The Fed’s latest projections show that most policymakers do not anticipate raising rates until at least 2024.

Powell Downplays Inflation Risks

In a press conference following the meeting, Powell addressed the main concern that has rattled investors and consumers in recent months: inflation. The Fed’s preferred measure of inflation, the core personal consumption expenditures (PCE) index, rose 3.6% year over year in July, well above the Fed’s 2% target. Powell acknowledged that inflation has been higher and more persistent than expected, but he attributed most of the increase to temporary factors related to the reopening of the economy and supply chain disruptions.

Powell said he expects inflation to moderate as these factors fade and supply and demand balance out. He also said that the Fed has the tools and the willingness to act if inflation becomes a problem. “We are not going to let this happen,” he said, referring to a scenario where inflation becomes unanchored and undermines the public’s confidence in the Fed’s credibility.

Powell Cautious About Delta Variant Impact

Another factor that could affect the Fed’s policy outlook is the impact of the delta variant of Covid-19 on the economy. Powell said that while the variant poses a near-term risk, he does not expect it to derail the recovery. He noted that vaccinations have increased and that consumers and businesses have adapted to living with the virus. He also said that the Fed’s policy will depend on the actual outcomes of economic data, not forecasts or scenarios.

However, Powell also warned that the pandemic is not over and that there could be further setbacks or surprises. He said that the Fed will continue to monitor the situation closely and adjust its policy as appropriate. “We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis,” he said.

Market Reaction

The market reaction to the Fed’s announcement was muted, as investors had largely anticipated the Fed’s stance. The S&P 500 index closed slightly higher on Wednesday, while the 10-year Treasury yield fell slightly to 1.3%. The dollar index, which measures the greenback against a basket of major currencies, also edged lower.

Some analysts said that the Fed’s message was dovish, as it signaled no hurry to tighten monetary policy despite rising inflation pressures. Others said that the Fed’s message was balanced, as it acknowledged the progress made by the economy but also recognized the uncertainties and risks ahead.

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