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United States Monetary Policy July 2021

United States: Fed keeps rates at effective floor in July; hints at tapering its QE purchases

At its meeting on 27–28 July, the Federal Open Market Committee (FOMC) decided to hold the target range for the federal funds rate at its effective floor of 0.00%–0.25%, which was widely expected by market analysts. Furthermore, in order to ensure sufficient liquidity for households and businesses and the effective transmission of monetary stimulus to broader financial conditions, the Fed reaffirmed its commitment to increase its purchases of Treasury securities, and agency residential and commercial mortgage-backed securities, at least at the current pace of USD 80 billion per month and USD 40 billion per month, respectively. Additionally, the Bank will continue to offer large-scale overnight and term repurchase agreement operations.

The Fed kept the target range unchanged due to the economic fallout caused by the ongoing public health crisis. Despite economic activity continuing to gain momentum in recent months amid ample fiscal stimulus, employment is expected to remain below its pre-pandemic levels in the short term and the sectors most affected by Covid-19-related restrictions remain fragile, although they continue to show signs of improvement. Moreover, elevated inflation, which came in notably above the Fed’s 2.0% target rate in Q2, is believed to be largely transitory.

Looking ahead, the Fed reaffirmed it will likely keep the target policy rate at its current level until “labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”. That being said, the Bank noted that the economy is progressing towards its goals and it will continue to assess progress in its coming meetings. The majority of our panelists see the federal funds target rate ending this year at 0.25% and expect the first rate hike some time in 2023.

Commenting on July’s meeting, James Marple, senior economist at TD Economics, noted:

“The statement dropped hints at the conversation around tapering large scale asset purchases, but did not commit to any future plans beyond continuing to assess the situation. Still, the conversation certainly occurred among FOMC members. More details are likely to come out at the Chair’s press conference. We expect a more fulsome discussion at the Jackson Hole summit in late August and plans around tapering may be reflected in the September statement when new economic forecasts will also be released.”

The next FOMC meeting is scheduled for 21–22 September.

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