Fed plans to continue supporting economy “for some time,” according to minutes

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WASHINGTON (Reuters) – Federal Reserve officials remain cautious about the lingering risks of the coronavirus pandemic and have pledged to support the economy until its recovery is more secure, the report of the Commission revealed on Wednesday. last US central bank policy meeting.

FILE PHOTO: Federal Reserve Chairman Jerome Powell poses for photos with Fed Governor Lael Brainard (left) at the Federal Reserve Bank of Chicago in Chicago, Illinois, U.S. June 4 2019. REUTERS / Ann Saphir / File Photo

With their own forecasts projecting the strongest US economic growth in nearly 40 years, “participants agreed that the economy was falling far short of (the Fed’s) longer term targets and the way forward remained very uncertain.” the March 16 minutes. -17 meeting says.

“Participants noted that it will probably take some time” before conditions improve enough for the central bank to consider reducing its current level of support.

Although several policymakers at the meeting indicated that they believed interest rates might have to rise earlier than expected by most of their colleagues, and perhaps as early as next year, there was little sentiment. urgently around this issue in the minutes.

Labor markets were improving, but remained torn by the pandemic. Inflation would pick up, the minutes noted, but would likely subside next year. A recent surge in US Treasury yields was “generally seen as reflecting improving economic prospects.”

Only a few officials cited potential risks to financial stability stemming from the Fed’s current policy of keeping its overnight key rate close to zero and buying $ 120 billion in bonds each month – a parameter that, according to the Fed, is stuck until the economy is on track. way to be healed.

This process is underway, with the economy bolstered by Fed support, massive budget spending pushed by the White House and passed by Congress, and an accelerated COVID-19 vaccination program.

But even with a “brighter outlook,” Fed Governor Lael Brainard told CNBC the wounds in the economy remain deep and the Fed’s new approach is to not act as long as its targets are. employment and inflation are not achieved.

Policymakers expect “considerably better results on growth, jobs and inflation” in the months to come, Brainard said. “But it’s a prospect. We will really have to see that in the data ”, and with millions of jobs still missing due to the pandemic“ we still have a way to go ”.

But progress can also be rapid as the economy reopens and the impact of vaccines is felt. The US economy created nearly a million jobs in March, and that pace may well continue as more activity is seen as safe to pick up.

Bob Miller, BlackRock’s head of fixed income for the Americas, said he felt the Fed could no longer document the gap between the economy’s continued progress and its own insistence on maintaining policies designed to a crisis.

“It’s hard to understand how the policy is properly calibrated now. The same emergency position remains despite the absence of emergency conditions, ”Miller wrote. “The reluctance to recognize the degree of improvement seems increasingly contested,” a position that may need to change by the time the Fed policy meeting in June.

‘READY TO BE BOLDER’

The prices of various securities affected by the Fed’s target interest rate show that investors expect the central bank to raise rates sooner than its own projections indicate.

Chicago Fed Chairman Charles Evans, who agrees with the majority of his colleagues that the Fed’s benchmark overnight interest rate is likely to remain near zero until 2023, said he envisioned an uncomfortable period of higher inflation this year. But he insisted that the Fed should not move until it is sure prices will not fall below its 2% inflation target.

“We really have to be patient and be prepared to be bolder than most conservative central bankers would choose to be,” he told reporters after an event hosted by the University of Nevada, Reno.

Speaking separately in a virtual session hosted by UBS, Dallas Fed Chairman Robert Kaplan reiterated his long-standing concerns that low interest rates and Fed bond purchases could fuel the excesses in the markets.

Once the pandemic has receded, Kaplan said, the Fed is expected to cut its bond purchases and raise rates in 2022, and he has indicated that he may even be willing to do both at the same time.

Reporting by Howard Schneider, Ann Saphir, Jonnelle Marte; Editing by Dan Burns, Andrea Ricci and Paul Simao

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