The FOMC statement released yesterday maintains status quo on the base rate. The following were the main decisions at the FOMC meeting:
- To undertake open market operations to maintain the federal funds rate in a target range of 0 to 0.25%.
- Purchase of treasury securities will be US$ 80 billion per month and mortgage-backed securities US$ 40 billion per month.
- The US Dollar liquidity facility offered to central banks across the world to tide over any dollar liquidity requirement to continue.
The Fed Chairman, in the Press Briefing that followed addressed a whole host of issues, and clearly signalled continuation of the current policies till the set objectives are achieved.
Economic activity is gradually recovering from the levels to which it had fallen in the second quarter. GDP growth has picked up in Q3. Household spending has risen especially in durable goods. But the spending on services remains poor especially in sectors like travel and hospitality. The spurt in spending has been to a major extent due to the economic stimulus payments received by the households. Therefore, the current uptick needs to be sustained for durable gains in future.
On the employment numbers, about 22 million jobs were lost during the first few days of the pandemic, and roughly half of the jobs have been re-established. But the unemployment rate still remains at 6.70% due to slower jobs growth, and this requires to be brought down to lower levels by ensuring job growth in the coming days, to 5% in 2021, and 4% in 2023.
The price level remained soft post the pandemic, and the average inflation remained below the target rate of 2%. The FOMC’s median inflation projection is 1.20% for this year, which rises to 1.80% next year, and 2.00% in 2023. The Fed states, “Our ability to achieve maximum employment in the years ahead depends importantly on having longer term inflation expectations well anchored at 2%……with inflation running persistently below 2%, we will aim to achieve inflation moderately above 2% for some time so that inflation average is 2% over time and longer-term inflation expectations remain well anchored at 2%. We expect to maintain an accommodative stance of monetary policy until these employment and inflation outcomes are achieved.”
The current anchoring of the policy remains where it is with the average inflation target at 2% and the unemployment rate at 5%, and the Fed continuing to buy assets to provide liquidity support to the markets. This leaves only one event of contra implications, that is, if the recovery happens faster than expected with a dip in unemployment and a rise in inflation too, the Fed policy may undergo changes earlier than one would have imagined, and the unwinding of the asset purchases would then start hurting the markets. Anyway, this may not be an immediate prognosis, but the rise in US treasury yields is probably a signal that cannot be ignored.
