Interest Rate in USA

USA - Interest Rate

Fed keeps rates at effective floor in April and sustains commitment to expanding its balance sheet

At its meeting on 27–28 April, 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 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 depressed, albeit showing some signs of improvement. Moreover, the recent jump in inflation, which came in above the Fed’s 2.0% target rate in March, seems to have been predominately driven by transitory factors. 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.

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”.

Commenting on April’s meeting, James Orlando, senior economist at TD Economics, noted:

“The Fed isn't ready to signal a tightening of monetary policy but it should begin laying out the path forward. Financial markets are already doing this, with the bond market pricing an earlier rate hike cycle than the Fed is telegraphing. Any further shift in its openness to policy tightening could result in a further jump in Treasury yields.”

The next FOMC meeting is scheduled for 15–16 June.

FocusEconomics Consensus Forecast panelists project the federal funds target rate to end 2021 at 0.25% and 0.29% in 2022.