U.S. Federal Reserve holds rates near zero, says economy has ‘strengthened’

 U.S. Federal Reserve holds rates near zero, says economy has ‘strengthened’

The Federal Reserve held interest rates and its monthly bond-buying program steady on Wednesday, nodding to the U.S. economy’s growing strength but giving no sign it was ready to reduce its support for the recovery.

“Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” the U.S. central bank said in a unanimous policy statement at the end of a two-day meeting.

Nevertheless, “the path of the economy will depend significantly on the course of the virus, including progress on vaccinations,” the Fed said. “The ongoing public health crisis continues to weigh on the economy and risks to the economic outlook remain.”

The language about the coronavirus reflected a slightly less negative view than the Fed’s description in March, when it said the health crisis “poses considerable risks to the economic outlook,” and analysts took note.

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Coupled with the strong language on the economy, analysts said that suggested at least a small step by the Fed towards the beginnings of a discussion about when to wean the U.S. economy from crisis-era programs.

“It is very much tiptoeing in the direction of a stronger economic backdrop that could potentially justify tapering and eventual rate increases,” said Steven Violin, portfolio manager for F.L.Putnam Investment Management Company in Wellesley, Massachusetts.

Yet despite the evidence of improvement, the Fed on Wednesday left unchanged the list of conditions, first set in December, that must be met before it considers pulling back from the emergency support put in place to stem the economic fallout of the pandemic in 2020.

That includes “substantial further progress” towards its inflation and employment goals before stepping back from its monthly bond purchases.

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“It is not time yet,” to begin discussing any change in policy, Fed Chair Jerome Powell said in a news briefing after the release of the statement, repeating his assessment that the economy was still a long way from a return to full employment.

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MONTHS DOWN THE ROAD

Investors and analysts had expected this week’s Fed meeting would see little if any change to the policy statement, and the initial reaction in financial markets was muted.

The benchmark S&P 500 index was around the unchanged mark on the day, and yields on longer-dated U.S. Treasury securities remained modestly higher. The dollar weakened fractionally against a basket of key trading partner currencies.

U.S. job growth has been accelerating and the Fed expects inflation to rise to its 2% target over time, eventually allowing it to trim its $120 billion in monthly bond purchases and raise its target overnight interest rate from the current level near zero.

But even that first step of tapering bond purchases is likely months down the road, and the Fed gave no indication in Wednesday’s statement that there is any rush.

The economy remains more than 8 million jobs short of where it was before the pandemic forced whole industries to shut down in an effort to control the spread of the virus.

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The expansion of the COVID-19 vaccination program has contributed to expectations for fast economic growth this year, though the Fed acknowledged that the economy’s prospects will be contingent on continued progress in managing the pandemic.

(Reporting by Howard Schneider, Jonnelle Marte and Ann Saphir Additional reporting by Charles Mikolajczak in New York Editing by Paul Simao)

© 2021 Reuters