Wilmington Trust Chief Economist Luke Tilley and Federated Hermes Global Equities CIO Steve Auth provide feedback and analysis
Federal Reserve officials were convinced last month that the United States economy and job growth have slowed as coronavirus cases have increased across the country, noting that the outlook depends heavily on the course of the virus.
The minutes, released on Wednesday, of the Fed’s discussions in January, show that officials believe the ongoing public health crisis still poses “considerable risks” to the economy.
The minutes also reflect the Fed’s broad support for the central bank’s policy of emphasizing ultra-low interest rates to boost the economy and help millions of Americans recover lost jobs.
“Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy at this challenging time,” according to the minutes, which covered the Fed’s discussions at its January 26-27 meeting. .
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The minutes note some improvement in the medium-term outlook for the economy, as vaccine distribution increased and Congress passed a $ 900 billion relief measure that provided more direct payments to individuals and expanded unemployment benefits.
At its January meeting, the Fed kept its base interest rate at a record low from zero to 0.25% and pledged to continue pursuing its low interest rate policies until an economic recovery is well underway.
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The Fed will not meet again until March 16 and 17. Fed Chairman Jerome Powell, however, will appear in Congress next week to deliver the central bank’s semi-annual monetary report to Congress, an appearance that financial markets will follow closely in search of any clues to the Fed’s future moves on interest rates.
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The Fed has signaled that it does not plan to start raising interest rates before 2023. In addition to the low rates, the Fed is buying $ 80 billion in Treasury bills and $ 40 billion in mortgage-backed bonds every month and analysts expect that these purchases continue for some time.
Analysts said the minutes did not indicate any change in the Fed’s emphasis on keeping rates low until the economy recovers.
Paul Ashworth, chief economist at Capital Economics, said he believes the Fed will not start reducing its monthly bond purchases until next year and that the Fed’s first rate hike will not occur until 2024. Charlie Ripley, senior investment strategist at Allianz Investment Management said that the main result of the minutes is that “the accommodative monetary policy will remain in force for the foreseeable future”.
The minutes show that the Fed team updated Fed officials on their assessment of the stability of the US financial system. The team noted that some financial market assets had high ratings.
“The team assessed the vulnerabilities associated with lending to households and businesses as notable, reflecting the increase in leverage and the decrease in revenues and revenues in 2020,” said the minutes.
But the team’s presentation said that banks continued to maintain significant levels of high-quality assets and stable sources of financing should loan losses begin to increase.
In comments last week to the New York Economic Club, Powell emphasized the Fed’s commitment to reducing unemployment to minimum levels over several decades.
Powell said that although last year’s initial recovery, helped by nearly $ 4 trillion in government support, was surprising, the country “is still a long way from a strong job market, the benefits of which are widely shared”. The government on Wednesday released the biggest monthly gain in wholesale prices in more than a decade. That news came after a report last week that consumer prices rose in January at the fastest pace in four months.
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Powell warned that inflation, which did not appear in the past decade, may accelerate for some time in the coming months, as the country opens up. But he and many private economists believe that this will only be a temporary increase and not a sign that inflation is getting out of hand.