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Fed Declines to Raise Interest Rates Even As Economy Grows

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Noting that the US economic recovery remains uneven and incomplete, the Federal Reserve declined to raise interest rates Wednesday. For the time being, it will retain its easy money policy in place even as it acknowledged the economy is starting to roar.

RELATED: Fed Chair Powell: ‘A Long Way To Go’ Until Economy Is Out Of The Woods

Fed Declined To Raise Interest Rates

In an expected move, the central bank kept interest rates to near-zero levels even as it continued its monthly $120 billion bond purchases.

This move aims to support the US economy as it tries to get back on its feet. In fairness, the moves are paying off. 2021 started well for the market and is gaining momentum. Increased availability of vaccines and the easing up of individual states contributed to the more optimistic reopening. 

Federal Reserve officials led by chairman Jerome Powell acknowledged that the US economy is growing stronger and that inflation is on the rise. However, they remain in a wait-and-see mode for recovery to become sustainable.

For the moment, the Fed unanimously decided not to raise interest rates.  At the same time, Powell and the company did not give any indication on when they plan to raise the rates. 

‘Uneven and Far From Complete’

Powell noted that the US recovery remains “uneven and far from complete” as he foresees inflation rising in the next few months. He did say that these “one-time increases in prices are likely to only have transitory effects on inflation.”

The Fed chairman said that now is not the time to talk about reducing policy accommodation. This includes discussions about asset purchases.

“It will take some time before we see substantial further progress,” he said. Powell’s group of Fed officials, known as the Federal Open Market Committee, used “substantial further progress” repeatedly in their post-meeting statement.

Stocks Tumble Down After Fed Announcement

Despite a more accommodating tone, stocks tumbled upon hearing the Fed’s post-meeting news conference.  when he addressed the topic of financial stability. He noted that when some measure stability, “they look at some of the things that are going on in the equity markets, which I think do reflect froth.”

The FOMC also noted that government efforts to combat the Covid-19 pandemic helped boost the economy. However, they think the US needs to do more to win the battle. “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” the committee said.

Economic Progress Depends On The Pandemic

“The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors.

Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses,” the FOMC added. The continuation of economic progress now depends largely on how the pandemic fares. 

“The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain,” the statement said. Notable is the absence of the word “employment” in the Fed’s statement. While March showed the word, which denoted a jobs crisis, April did not feature employment as a problem. This indicates that officials see improvement in the labor market.

Best Full Year Since 1984

The Fed’s decision to not raise interest rates comes a day before the Commerce Department releases its preliminary first-quarter GDP figures. The US is projecting a gain of 6.5%, which most experts saw can continue and give the US its best full year since at least 1984.

Rising government bond yields, which indicate higher inflation expectations, jolted stocks in March, but they’ve held steady since.

With the recovery comes inflation. March consumer prices showed a rise of 2.6% for the fastest year-over-year increase since August 2018. Markets are currently pricing at a 5-year inflation rate of around 2.5%.

In contrast, the rates are less than 0.8% last year. Meanwhile, Goldman Sachs’ latest inflation forecast sees it remaining around Fed target levels of 2.2% until 2024 at the earliest. This rate, when viewed through the core personal consumption expenditures price index, can run at 2.05% at the end of 2021, then 2%, 2.1%, and 2.2% each year through 2024, respectively. 

Inflation’s Effects

Already, multiple companies reported that rising cost pressures and their need to hike prices. Procter & Gamble and Kimberley Clark already announced their intention to raise prices on some feminine and cleaning products. Meanwhile, other companies pledged to absorb external cost pressures rather than pass it on to consumers. 

“The market doesn’t like uncertainty. We’ve got uncertainty around corporate taxes, we’ve got uncertainty around interest rates, we do have uncertainty around supply chain disruptions and cost inflation,” said Rebecca Corbin, CEO of Corbin Advisors.

“Companies are good at managing through that. They’ve already put into place mitigation strategies, and everyone is contending with that,” she said.

However, Fed officials insist any pressure on prices is likely temporary and will ease after supply chain issues subside.  As such, the central will allow inflation to run higher than its traditional 2% goal while it chases full and inclusive employment.

Watch the CNBC TV video reporting on Federal chair Jerome Powell: One-time price increases not likely to lead to persistent inflation:

Do you agree with the Fed’s decision to not raise interest rates despite a growing economy?

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Do you agree with the Fed’s decision not to raise interest rates even as the economy starts heating up? Do you foresee any problems with this decision?

Let us know what you think. Share your comments in the comments section below.

8 Comments

8 Comments

  • Avatar BILLY J GOBER says:

    The Biden Economy is strictly one made up of the government and idiots relaxing the rules on COVID. The economy will tank completely in another year no matter what FEDS do to the interest rate. Once all COVID relief goes away all the free money will just print more and lazy people still refuse to go back to work. Once you have them in the system harder for them to get off the free dollars. But of course perfect voter for the Democrats and mid term elections and out to 2024. The economy is booming in many states because the flee of business and people from Democrat run states where the laws and tax are so much of a burden on the people they are leaving. This is happening with big business also. We will se the states of NY and California become like Michigan.The only way to correct this now is to KILL other Americans it gone way to far.Free money for your vote and Liberal thinkers have destroyed what use to be a hard working proud American society.

  • Avatar David says:

    I voted “No. The market won’t fully recover…”. The answer should be Yes. The market won’t fully recover…”

  • Avatar Robert Anderson says:

    The rates in the USA has fluctuated so much since the 1930’s. And the fed rates will never level out.

  • Avatar Tom murphy says:

    The Democratic Party is pushing so many left wing promised agendas to pay back all the support they needed to win the election .They now feel its time to take over America with this term at any cost .Its like raising children keep them busy so the dont get into trouble .The dems are keeping all that has to try and read what all is being shoved into law so fast dangerous things are getting passed that is changing america with socialist agendas with in all this push .So we had better leave the intrest rates where they are until the dust settles on all this unknown territory we are going thru .Or we are headed for some unchangable times that is un called for in the name of the few that just dont like freedom of its people and think they have the answers.leave some stability in our system that has worked for the masses not this power grab we are witnessing.

  • Avatar Tom murphy says:

    The Democratic Party is pushing so many left wing promised agendas to pay back all the support they needed to win the election .They now feel its time to take over America with this term at any cost .Its like raising children keep them busy so the dont get into trouble .The dems are keeping all that has to try and read what all is being shoved into law so fast dangerous things are getting passed that is changing america with socialist agendas with in all this push .So we had better leave the intrest rates where they are until the dust settles on all this unknown territory we are going thru .Or we are headed for some unchangable times that is un called for in the name of the few that just dont like freedom of its people and think they have the answers.leave some stability in our system that has worked for the masses not this power grab we are witnessing.and no i havet said this about our economy before

  • Avatar Karen Fortier says:

    Inflation is a killer, particularly for the middle class, and the “great reset” promoted as panacea not only threatens our democracy, but threatens the economic survival of a huge percentage of Americans. We seem to be being herded blindly toword the ultimate demise of America, as conceived, as the cornerstone of freedom and democratic ideals

  • Avatar Ioana Cuprian says:

    Agreed.

  • Avatar Natasha Lofft says:

    I voted so that tells you, I do NOT feel there is anything else I want to say about it.

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