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United States Monetary Policy March 2021

United States: Fed keeps rates at effective floor in March and sustains commitment to expanding its balance sheet

At its meeting on 16–17 March, 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%. Moreover, the Fed reaffirmed its commitment to using its full range of powers to support the economic recovery at its current pace. The decision was widely anticipated by market analysts.

The Fed kept the target range unchanged due to the economic fallout caused by the ongoing public health crisis. Despite economic activity gaining momentum in recent months and the approval of a third U.S. stimulus package in March, employment levels are expected to remain below their pre-pandemic levels in the short term and the sectors most affected by Covid-19-related restrictions remain depressed. Moreover, price pressures are seen remaining muted in the near term, with inflation coming in below the Fed’s 2.0% target rate in February. Meanwhile, 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. Furthermore, the Bank will also continue to offer large-scale overnight and term repurchase agreement operations.

Looking ahead, the Fed revised its economic projections upward in March and now sees GDP growing 6.5% in Q4 2021 (December projection: 4.2%). Meanwhile, it expects the unemployment rate to average 4.5% in Q4 2021 (December projection: 5.0%) and the personal consumption expenditures inflation rate—closely watched by the Bank to monitor price pressures—to average 2.4% in the fourth quarter of this year, which is up from December’s 1.8% forecast. That said, despite the improved outlook, 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”.

Commenting on March’s meeting, Avery Shenfeld, chief economist at CIBC World Markets, noted:

“The Fed tried to tell markets to take a chill pill, improving their outlook for the U.S. economy, while avoiding scaring bond investors by downplaying the usual hawkish consequences of that economic upgrade. […] In sum, the Fed is telling us that the outlook is better, but don’t worry your little heads too much about rate hikes ahead. Although, by saying conditions are still accommodative, it suggests it’s not that concerned with increases in bond yields thus far.”

The next FOMC meeting is scheduled for 27–28 April.

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