As expected, the actual FOMC rate decision turned out to be a non-event. Policymakers voted in favour of keeping interest rates on hold at near-zero and its monthly bond-buying program steady at $120bn. The policy statement however held more importance. The overall tone of the policy statement reflected a slightly less pessimistic outlook on the economy compared to the March statement.
The central bank strengthened its assessment of the economy, signalling that risks pertaining to the COVID-19 pandemic are subsiding. Specifically, the FOMC said, “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened.”
While there was a clear improvement in the central bank’s assessment of the economy, the FOMC noted that risks to the economic outlook remain. Fed Chairman Jerome Powell said the recovery is “uneven and far from complete.” Given the lingering risks to the economic outlook, policymakers remain supportive of the Biden Administration’s expansive fiscal policy, with central bankers noting that millions of Americans are still unemployed.
On the inflation front, the Fed said that inflation has quickened. However, it continued to state that the rise in inflation reflects transitory factors. The central bank noted that conditions in the labour market have continued to improve as the economy reopens and the population builds immunity to the coronavirus.
While the US’s economic prospects have improved on the back of the significant progress being made on the vaccine front and the aggressive fiscal stimulus being deployed by the Biden administration, the Fed noted that substantial further progress towards its inflation and employment goals is required before it begins normalising policy and slows its monthly bond purchases. Therefore, we expect the Fed to maintain its steady-as-she-goes approach in the months ahead.